S&P Cuts Outlook for 25 Small Australian Banks

Standard and PoorsCredit ratings firm S&P Ratings has slashed the outlook for all second-tier banks in Australia citing increasing property risks. The firm announced earlier this week that it was issuing a negative outlook for 25 Australian banks including AMP Bank Bendigo and Adelaide Bank, Bank of Queensland and Macquarie Bank.

According to S&P, the change in ratings was warranted due to the 1-in-3 chance of a strong growth trend in housing prices and debt which could result in a crash of property prices. The ratings announcement did not include Australia’s four largest banks which are the National Australia Bank, Westpac, Australia and New Zealand Banking Group and Commonwealth Bank – which already has a negative outlook after a ratings cut earlier was announced earlier this year.

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In a statement, Standard & Poor's said

In our opinion, economic risks facing all financial institutions operating in Australia are rising due to the strong growth in private sector debt and residential property prices in the past four years, notwithstanding some signs of moderation in growth in recent months. We believe the risks of a sharp correction in property prices could increase and if that were to occur, credit losses incurred by all financial institutions operating in Australia are likely to be significantly greater

In its report, the agency pointed out the sharp rise in the private sector debt-to-GDP ratio. The rate has gone up from 118 percent in 2012 to 139 percent in June this year. There have also been signs of strong growth in housing prices across major cities like Sydney and Melbourne in the past few months, with auction clearance rates said to be hitting record highs.

The agency said that both the country’s economy as well as the financial system has several external weaknesses that could heighten losses in case of a real estate crash.

S&P has noted that its assessment of a sharp fall in property prices was a stress-case scenario and may not happen in the next two years. S&P has also highlighted a number of favorable factors that might offer support and pointed out that Australia has one of the most reliable banking systems with highest globally stability as well as conservative banking practices along with strong oversight.

The agency’s most-likely scenarios is where the housing prices and debt levels see a slowdown in growth as a result of substantial new housing units entering the markets in Melbourne, Brisbane and Sydney. S&P however believes that there are strong chances of house prices growing due to very low interest rates, relatively positive economic outlook and banks targeting the profitable mortgage market for profitability gains.