‘Increased risk of a sharp correction’: S&P

In a research note released yesterday, S&P said economic imbalances in Australia have increased due to strong growth in private sector debt and residential property prices in the past four years, notwithstanding some signs of moderation in growth in recent weeks.

“Consequently, we believe financial institutions operating in Australia now face an increased risk of a sharp correction in property prices and, if that were to occur, a significant rise in credit losses.”

S&P has lowered its assessment of the standalone credit profiles (SACPs) of almost all financial institutions operating in Australia.

The ratings agency pointed to the Sydney and Melbourne property markets, where it believes continued price growth has led to “the risk of a sharp correction” in property prices.

With residential home loans securing about two-thirds of banks' lending assets, S&P believes the impact of a housing correction on financial institutions would be amplified by the Australian economy's external weaknesses, in particular its “persistent current account deficits and high level of external debt.”

S&P has downgraded the ratings of AMP Bank (A+ to A), Auswide Bank (BBB to BBB-), Bank of Queensland (A- to BBB+), Bendigo and Adelaide Bank (A- to BBB+), Credit Union Australia (BBB+ to BBB), Defence Bank (BBB+ to BBB), G&C Mutual Bank (BBB to BBB-), Greater Bank (BBB+ to BBB), IMB (BBB+ to BBB), Liberty Financial (BBB to BBB-) ME Bank (BBB+ to BBB) MyState Bank (BBB+ to BBB) and many others.  

Meanwhile, S&P has affirmed its issuer credit ratings on the major banks, reflecting the agency’s expectation of “timely financial support from the Australian government if needed”. However, the big four remain on negative outlook based on potential pressures on government support.

[Related: Housing risks not addressed in budget: Moody's]