S&P downgrades most Australian lenders on housing concerns

by NZ Adviser24 May 2017
(Bloomberg) -- S&P Global Ratings downgraded the credit scores of almost all of Australia’s financial institutions as it warned about the risks of a property market downturn, though expectations of government support saw the largest banks spared.

Some 23 issuers had their ratings lowered, including Bank of Queensland Ltd., Bendigo & Adelaide Bank Ltd. and AMP Bank Ltd., as S&P warned that the country’s wider economic challenges added to the threat.

“The risk of a sharp correction in property prices has increased,” S&P said in a statement on Monday. “With residential home loans securing about two-thirds of banks’ lending assets, the impact of such a scenario 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 exempted the country’s four largest mortgage lenders -- Australia & New Zealand Banking Group Ltd., Commonwealth Bank of Australia, Westpac Banking Corp. and National Australia Bank Ltd. -- on the assumption that the government would step in to provide support if needed. It also opted not to lower the ratings for Macquarie Group Ltd. and its banking unit.

Other ratings companies have voiced similar concerns about risks stemming from Australia’s housing market. Moody’s Investor Services said in May the combination of low wage growth and rising house prices mean households are becoming more highly leveraged, thereby “increasing the major banks’ sensitivity to external shocks.” The ratings company lowered its outlook for the five largest banks to negative in August.

Fitch Ratings expects pressures in the housing market to grow but remain manageable given the strength of the Australian banking system. “It would take a significant rise in unemployment or interest rates to cause meaningful losses on mortgage lending,” senior Fitch director Tim Roche wrote in a note earlier this month.

Surging prices
Home prices in Sydney and Melbourne have surged in the wake of unprecedented interest-rate cuts by the Reserve Bank of Australia as the country navigates its way through the aftermath of a mining boom. Regulators have progressively tightened lending restrictions amid concerns about financial stability.

In March, the Australian Prudential Regulation Authority introduced new restrictions on interest-only lending and the Australian Securities & Investments Commission said it was investigating lending standards in that sector of the mortgage market. In the recent federal budget, the government said it will legislate to give APRA greater powers over the shadow banking sector as well as the authority to set mortgage lending curbs by geography.

S&P last week maintained Australia’s sovereign rating at AAA with a negative outlook. The ratings company warned then the nation’s prized top ranking would only be secure once there was “meaningful moderation” in housing and credit growth.


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