Tuesday 23 May 2017 by General

S&P lowers the credit ratings of 23 Australian financial institutions

S&P Global Ratings have lowered the stand alone credit profiles of 23 Australian financial institutions by one notch

S&P Global Ratings logo

On 22 May, S&P Global Ratings (S&P) lowered the stand alone credit profiles (SACP) of 23 Australian financial institutions by one notch.

S&P also affirmed issuer credit ratings on ANZ, CBA, NAB and Westpac on the assumption that the Australian government would step in to provide support if the banks were under duress. However, they remain on negative outlook.

The ratings and outlook actions reflect S&P’s view that Australia’s economic imbalances have increased, due to strong growth in private sector debt and residential property prices over the last four years. S&P believe Australian financial institutions now face an increased risk of a sharp correction in property prices and, if that were to occur, a significant rise in credit losses.

In addition, S&P note that as residential home loans secure about two thirds of banks’ lending assets, the impact of a sharp property price correction on financial institutions would be amplified by the Australian economy’s external weaknesses – in particular its current account deficits and high level of external debt.

We note that the reduction in the SACP of 23 Australian financial institutions was due to S&P changing Australia’s Banking Industry Country Risk Assessment (BICRA). S&P have changed Australia’s BICRA from “2” to “3”, due to its view of a buildup of economic imbalances. The BICRA is S&P’s assessment of the industry and economic risk of an individual country, which anchors the creditworthiness of a bank in that operating environment. The BICRA scores range from one (low risk) to 10 (highest risk).

S&P stated:

Despite increased downside risks, in our base case we expect that recent and possible further actions by the Australian authorities should aid in an unwinding of imbalances in an orderly fashion. To reflect the increased risk, we have lowered our assessment of the stand alone credit profiles of almost all financial institutions operating in Australia, and are lowering our long-term issuer credit ratings on 23 financial institutions in Australia by one notch each”.

Among those affected by the ratings downgrade were some well known banks such as Bank of Queensland, Bendigo & Adelaide Bank, and Member’s Equity Bank. In the debt space, major bank, insurance companies and offshore banks were largely unaffected. We note that regional banks’ senior and sub investment grade debt repriced slightly cheaper, especially where bonds moved from investment grade to sub investment grade.

For example, the ME Bank floating rate subordinated retail bond – with an August 2019 call date and final maturity in August 2024 – moved to sub investment grade, one notch lower than ME’s new issuer credit rating. The price had remained relatively flat over the week, however since S&P’s ratings action, the mid price has fallen from 102.23 to 101.72.


Source: FIIG Securities

Outside of banks, other financial institutions felt the effects of the ratings downgrade almost immediately. Liberty Financial’s new senior unsecured issue repriced higher given a step up margin of 0.50%, following the issuer’s downgrade from BBB to BBB-. More information on Liberty’s new issue can be found in our company updatesExternal link - opens in a new window.

A summary of the ratings downgrades and outlook actions from S&P are below.

Ratings downgrades

Financial institution From To
AMP Bank A+/Negative/A-1 A/Stable/A-1
Australian Central Credit Union BBB+/Negative/A-2 BBB/Stable/A-2
Auswide Bank BBB/Negative/A-2 BBB-/Negative watch/A-3
Bank of Queensland A-/Negative/A-2
BBB+/Stable/A-2
Bendigo & Adelaide Bank A-/Negative/A-2
BBB+/Stable/A-2
Community CPS Australia BBB+/Negative/A-2
BBB/Stable/A-2
Credit Union Australia BBB+/Negative/A-2
BBB/Stable/A-2
Defence Bank BBB+/Negative/A-2
BBB/Stable/A-2
Fisher & Paykel Finance BB/Negative/B
BB-/Stable/B
G&C Mutual Bank BBB/Negative/A-2
BBB-/Stable/A-3
Greater Bank BBB+/Negative/A-2
BBB/Stable/A-2
IMB Bank BBB+/Negative/A-2
BBB/Stable/A-2
Liberty Financial Limited BBB/Negative/A-2
BBB-/Stable/A-3
Liberty Financial Pty Ltd BBB/Negative/A-2
BBB-/Stable/A-3
Mecu Ltd BBB+/Negative/A-2
BBB/Stable/A-2
ME Bank BBB+/Negative/A-2
BBB/Stable/A-2
MyState Bank BBB+/Negative/A-2
BBB/Negative/A-2
Newcastle Permanent Building Society BBB+/Negative/A-2
BBB/Stable/A-2
Police Bank BBB+/Negative/A-2
BBB/Stable/A-2
Qudos Mutual BBB/Developing/A-2
BBB-/Positive/A-3
QPCU BBB/Negative/A-2
BBB-/Stable/A-3
Rural Bank A-/Negative/A-2
BBB+/Stable/A-2
Teachers Mutual Bank BBB+/Negative/A-2
BBB/Stable/A-2
Source: S&P Global Ratings

Outlook actions

Financial institution From To
ING Bank Australia A-/Positive/A-2 A-/Stable/A-2
Macquarie Group BBB/Negative/A-2 BBB/Stable/A-2
Police & Nurses Bank BBB/Developing/A-2 BBB/Stable/A-2
Source: S&P Global Ratings

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