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Standard and Poor's downgrades ratings of big four Australian banks and their NZ units by one notch to AA-

Posted in News Updated

Standard & Poor's has downgraded the credit ratings of the big four Australian banks and their new New Zealand units by one notch to AA- as part of its global review of bank ratings. Their ratings outlooks are stable.

S&P cut ANZ National Bank Ltd's rating and UDC Finance's rating to AA- from AA, having also cut the rating of their Australian parent ANZ Group to AA- from AA. See S&P's report on ANZ here.

It cut Commonwealth Bank of Australia's rating to AA- from AA and that of its subsidiary ASB to AA- from AA. See S&P's report on CBA here.

National Australia Bank's rating, and that of its subsidiary Bank of New Zealand, were cut to AA- from AA. See S&P's report on NAB here.

Westpac Banking Corp's rating was cut to AA- from AA. Its New Zealand subsidiary Westpac New Zealand was cut to AA- from AA. See S&P's report on Westpac here.

Standard & Poor's cut Macquarie Bank's rating by two notches to BBB. See S&P's report on Macquarie here.

Funding costs may rise

The one notch downgrade of New Zealand's big four banks has been widely expected in the banking industry but could see bank funding costs rise. Sydney-based Royal Bank of Scotland banking analysts Andrew Lyons, Ashley Dalziell and John Buonaccorsi said earlier this year a one notch downgrade could add 15-30 basis points to term funding costs.

The ratings downgrades come after S&P's reviewed its bank rating methodology. Peter Sikora, S&P's analytical manager for financial institutions in the Pacific, told interest.co.nz in February the methodology revamp was both a continuing evolution of S&P's analysis and the incorporation of lessons learnt from the Global Financial Crisis. Sikora suggested then the big four New Zealand banks could be downgraded.

"The biggest thing we learnt from the Global Financial Crisis is that the operating environment plays a more significant part of an individual entity’s credit profile," said Sikora.

"While we always believed that, that gets a far more significant weighting in the new criteria. It’s akin to the example of having the best house in the street, but at the end of the day the quality of your house is also a function of the neighbourhood it’s in."

As part of the review S&P last month downgraded its Banking Industry Country Risk Assessment (BICRA) on New Zealand to group 3 from group 2, placing major local banks in the same group as banks from Italy, the United States, Britain and South Korea. S&P says the BICRA methodology evaluates and compares global banking systems using economic risk and industry risk factors.

A BICRA is scored on a scale from 1 to 10, ranging from the lowest-risk banking systems (group 1) to the highest-risk (group 10).

'We're still strong', ANZ, BNZ & ASB say

In a BNZ statement Treasurer Tim Main said the new AA- rating continued to reflect BNZ’s strong ability to repay principal and interest on its debts in a timely manner.

“BNZ retains an AA- long term credit rating which ensures, subject to market conditions, our good access to offshore funding and a strong capacity to meet our financial commitments," Main said.

And in an ANZ group statement chief financial officer Peter Marriott said ANZ remained one of a select group of banks globally with a AA category rating under S&P’s new bank ratings criteria.

“We continue to be regarded as amongst the strongest banks globally and with a return to the rating we held until the beginning of 2007, we are one of the few banks in the world to have come out of the global financial crisis with the same rating as we went into it with,” Marriott said.

In its statement ASB noted that S&P didn't specifically identify a change in the performance of ASB or CBA as part of its review and subsequent rating downgrade.

Earlier this week S&P released its ratings under its new methodology on 37 of the world's biggest banks. This saw Rabobank New Zealand cut two notches to AA from AAA, the Hong Kong based parent of New Zealand's HSBC - the Hongkong and Shanghai Banking Corporation Ltd - cut to AA- from AA, and big US investment banks Goldman Sachs, JP Morgan Chase & Co and Morgan Stanley downgraded.

Moody's cut too

The S&P downgrades come after its rival Moody's Investors Service downgraded the credit ratings of New Zealand's four biggest banks by one notch to Aa3 from Aa2 in May citing the country's subdued economy and the banks' exposure to wholesale financial markets, where they get around a third of their money, for funding.

Overnight Moody's said it was maintaining its stable outlook for the Australian banking system, citing the strength of both the banks' fundamentals and the domestic economy. However, it said various challenges were apparent, including the question of possible contagion from the European sovereign debt crisis.

"Australia's banks have built sizeable capital buffers to absorb possible weakness in asset quality, and they have a good measure of flexibility to deal with the challenging conditions in the international wholesale funding markets," said Patrick Winsbury, a Moody's Senior Vice President.

"Moreover, the banks' earnings are set to remain resilient, while their solid levels of capitalization mean they are positioned to absorb a broad range of downside scenarios," Winsbury said. "We also note the favorable nature of the deposit environment and a creditor-friendly regulatory environment."

(Updates add more detail).

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21 Comments

I have updated this with

I have updated this with further detail and background.

And the downgrades may end

And the downgrades may end George Kerr's tilt at PGC - http://www.interest.co.nz/news/56108/george-kerrs-pgc-takeover-bid-could...

I think the NZ locals subs

I think the NZ locals subs will be reasonably pleased to be only downgraded by 1 notch like the parents, given our BICRA is lower than Aussie's.

However the ratings agencies

However the ratings agencies didnt like the "living will" idea of Dr Bollard's, its removes the intrinsic guarantee that the Govn will support the banks....so we may see a downgrade here once that comes in...

I hope it does (2012 sometime?) before this melts down.....but it now looks to be happening so fast i just cant see it, I really wonder if before Xmas is now probable...Frances debt rollover for jan and Italy's for feb seem the furthest points.....unless the ECB and FED prints like mad......

Oh bugger....end 2012 so fat chance.

"A consultation document on the proposals was released in March. The Reserve Bank wants detailed implementation plans by January 16 next year and full operational capability from the banks by the end of 2012."

http://www.interest.co.nz/news/54712/does-rbnzs-living-wills-policy-mean...

regards

They are always too late with

They are always too late with upgrades and downgrades....and did they not lose their credibility a few years ago..when they helped the sub-prime bubble to grow and burst ?

Who needs them, except the Buffets and the Blankfeins...

Read it as too early with

Read it as too early with upgrades and too late with downgrades, thanks 

Many pension funds and

Many pension funds and councils across the US and the world lost heaps of money a few years ago..and the rating companies have not yet been made accountable for that.

Fitch weighs in: Fitch

Fitch weighs in:

Fitch Rating said in a new report that Australian banks are generally well positioned to meet new regulatory requirements as set out by the Basel III framework and interpreted by the Australian Prudential Regulation Authority (APRA).

"Australian banks are already largely compliant with the new capital rules, although importantly, regulatory capital ratios will continue to be lower than under a fully harmonized Basel III framework due to APRA's conservative interpretation of the rules," said Tim Roche, Director in Fitch's Financial Institution group. "The new liquidity rules pose a greater challenge, although ultimately this should be surmountable."

The report notes that for Australian banks the most difficult component of the new rules is the net stable funding ratio (NSFR). This is due in large part to the high level of long-term lending the banks have on their balance sheets. However, the long implementation timeframe - the NSFR will not be fully implemented until 1 January 2018 - should provide sufficient time for adjustment.

The other main component of the liquidity rules, the liquidity coverage ratio (LCR), is, in Fitch's view, less of a challenge following the announcement that the Reserve Bank of Australia will establish of a committed liquidity facility on 1 January 2015. This facility, which is permitted under Basel rules for jurisdictions such as Australia with insufficient qualifying high-quality liquid assets, will act as a backup source of liquidity; APRA will require banks firstly to manage liquidity on-balance sheet to the extent possible.

While the liquidity rules will be implemented in line with the Basel timeframe, APRA has accelerated the implementation of some segments of the capital rules, reflecting its confidence that banks will have little problem meeting them. Instead of staggering implementation over a period of several years, the new minimum capital requirements and the full 2.5% capital conservation buffer will apply in full from 1 January 2013 and 1 January 2016, respectively.

Some smaller areas of the Basel framework, such as counterparty credit risk, will be addressed by APRA in future discussion documents.

Don't expect Basel rules to

Don't expect Basel rules to save us; as I understand them sovereign debt is exempt from their prudential standards.

iS this the agency that rated

iS this the agency that rated Goldnan sachs and Lehman bros as triple a plus.

All i can say is that they must have POOR STANDARDS.

No, Basel is a town in

No, Basel is a town in Switzerland where the international Treaties meant to regulate Banks are held, hence they take that name . Of course the whole game is rigged in favour of your Goldman Sachs et al. It is worth looking into USA's repeal of laws: GlassStegal and their Bank Holding Act via (I think Bliley Act under Clinton) in the 1990's. Guess who drove it all? many of Obama's now Treasury staff who - guess what? used to work for Goldman! 

This is 3 years too late! 

This is 3 years too late! 

No it's not too late, it is

No it's not too late, it is related to Vaughn's article on Basel III which is being touted now by "regulators" as our banking safety net. It's patently not, as the most toxic debt on the planet now is sovereign  (which is exempt) in turn due to the socialization of Goldman, AIG, Freddie & Co losses run up because of the aforementioned repeals.

 

Timing is everything in

Timing is everything in economics and in life. 

Rating agencies are the

Rating agencies are the modern equavlent of the band on the Titanic.

The question is who would actually pay money to these fools at this stage?

Does this mean the banks will

Does this mean the banks will pay slightly more on their term deposits, now they're judged to be slightly more risky?

;)

cheers

Bernard

There is an unholy alliance

There is an unholy alliance in NZ betwixt Reserve Bank and Trading Banks to stop at nothing to avoid paying depositors higher rates eg. breaching s8 - 14 Reserve Bank Act (by tolerating 5-6% inflation, the Act does not say the Governor can "watch what happens in Europe") and the legalization of Covered Bonds. The historic inflation graph on on the R Bank's own website shows how things have gotten out of control during Bollards tenure exactly. Of course this all works in the banks favour, at depositors expense.     

Absolute rubbish, could it be

Absolute rubbish, could it be because there is no 5~6% inflation, yes thats correct there is no real 5% inflation. It say he can watch, he's allowed to look through....and thats what he's done, and once the one off GST hike is removed its going to be 3% and dropping.......as commodity prices are dropping.....hello 2%, Bollard's inaction was the correct thing...and in fact core inflation is still 2% and if anything its showing signs of dropping.

As a depositor put your money to work in a higher earning undertaking and not expect a high return for no risk when businesses etc are all out there taking risks.

regards

Read the Act and look at the

Read the Act and look at the graph.

Bernard old bean, capital

Bernard old bean, capital flight from the OBR and the ratings downgrades point to Bollard secretly printing...exchange of cash for 'mortgage securities' and other risky paper..likely as not an ocr cut to 2% wrapped up in silly comments about economic activity blah blah blah.

NZ is rushing headlong down the hole chasing the piigs.

The advertising rubbish pushing mortgage lending and property splurging is back with a vengence....bubble time again.....near zirp promises for all....buy buy buy.