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