S&P rating reflects growth prediction

The global ratings agency has forecast future growth in the Australian economy following its Group 3 classification of the country’s banking sector.

The AAA/Negative/-A+ rating was determined by an examination of the Australian banking industry’s performance against the agency’s economic and industry risk criteria.

An S&P report released last week attributed the promising rating to Australia’s healthy economic environment and has predicted continued growth in the Australian economy.

“Australia benefits from being a wealthy, open and resilient economy that has performed relatively well during and following negative cycles and external shocks, including the global recession in 2009,” the report said. “We forecast that solid economic growth will continue over the short to medium term, even if slightly below trend, given a muted recovery in non-mining business investment.” 

The strong rating of the domestic banking industry comes in spite of S&P’s concern over certain risk factors in the Australian economy.

“Australian banks are exposed to heightened imbalances reflecting strong growth in property prices (in particular, in two of the country’s most populous cities of Melbourne and Sydney) and private sector debt, in combination with Australia’s external weaknesses — in particular, its persistent current account deficits and high level of external debt.”

The report also highlighted that these conditions expose Australian banks to the “consequences of a sharp correction in property prices”.

Despite the warning, S&P believes that these consequences remain unlikely, predicting that loan losses will remain low in comparison to historical and international standards.

The report also referred to the banking sector’s competitive landscape as “low risk” and conducive to stability.

“We believe the structure of the banking industry is supportive of industry stability, with a small number of strong retail and commercial banks dominating the industry.” 

The classification places Australia in the rank of the UK, the US, Austria, the Netherlands, Denmark, South Korea and France.

[Related: Housing risks won’t undermine the banks: Moody’s]

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Charbel Kadib

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