Fears of a property market crash have prompted S&P to downgrade the creditworthiness of almost all of Australia’s finance sector.
The global ratings agency issued a statement on Monday explaining its decision was founded on the “economic imbalances” caused by soaring private-sector debt and property prices.
“Consequently, we believe financial institutions operating in Australia now face an increased risk of a sharp correction in property prices and, if that were to occur, a significant rise in credit losses,” the agency wrote.
“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.”
The rating downgrades applied to 23 financial institutions, including AMP, Bank of Queensland, and the Bendigo and Adelaide Bank.
The notable exceptions were the ‘Big Four’ (AA-) and Macquarie (AA), which kept their ratings, but only because the agency presumed they would be bailed out by the government in the event of any catastrophe.
The downgrades follow a March report by OECD warning that soaring house prices and ever-rising household debt had exposed the Australian economy to “extreme vulnerability”.
The Paris-based organisation — the research arm of the world’s richest nations — said the Australian property market was showing “hints of a slowdown” that could trigger “a rout on prices and demand” that spreads to all other parts of the economy, cutting consumer spending and pushing up mortgage defaults.
House prices have increased in real terms by 250 per cent from the 1990s, the OECD said, with most of that increase occurring over the past few years, particularly hitting first-time buyers in Sydney.
At the same time, the nation’s ratio of household debt to GDP has hit a record high at 123 per cent, the third highest in the world, the OECD report found.
Meanwhile, in S&P’s downgrade, AMP Bank was cut from A+ to A, while Bank of Queensland and Bendigo and Adelaide Bank both went from A- to BBB+. All three went from a negative to stable outlook, meaning the agency does not foresee further cuts in the immediate future.
Credit ratings measure how likely an institution is to be able to repay its bond holders on time and in full. Ratings between AAA and BBB are investment grade, while BB to D are speculative grade.
An institution rated A- is considered to have a “strong capacity” to repay, but is “somewhat susceptible to adverse economic conditions and changes in circumstances”. BBB equates to an “adequate” capacity to repay.
The other affected institutions were:
- Australian Central Credit Union
- Auswide Bank
- Community CPS Australia
- Credit Union Australia
- Defence Bank
- Fisher & Paykel Finance
- G&C Mutual Bank
- Greater Bank
- Liberty Financial
- Members Equity (ME) Bank
- MyState Bank
- Newcastle Permanent
- Police Bank
- Qudos Mutual
- Rural Bank
- Teachers Mutual
S&P joined the other two major ratings agencies last week in maintaining the Australian government’s AAA rating, but with a negative outlook.