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CBA, Westpac, ANZ suffer as S&P cuts ratings
The Australian 12:00am September 21, 2016
Michael Bennet
Credit Ratings effect the Cost of Debt
Three of the major banks have suffered a fresh credit ratings blow after Standard & Poor’s lowered their insurance arms, concerned about weaker -financial support amid asset sales and major reviews of operations.
After National Australia Bank and Macquarie Group offloaded their life insurance businesses in the past year, S&P yesterday claimed various wealth businesses owned by Commonwealth Bank, Westpac and ANZ may also not be “core” to the groups.
“In particular — contrary to our previously held view — we now consider that these entities may be severed from the parent banking groups, and operated as or sold on as ongoing businesses,” S&P analysts led by Sharad Jain said. “Consequently, we no longer consider that financial support from the parent groups, if needed, will be absolute and timely under all foreseeable situations.”
S&P downgraded six entities to A+, from AA-, including CBA’s Colonial Mutual Life Assurance Society, ANZ’s OnePath Life and Westpac’s life insurance arm. Colonial Holding Co and ANZ Wealth Australia were downgraded to A, from A+.
The blow adds to the banks’ rating concerns after S&P and rival Moody’s recently cut the outlook on their core AA- group ratings to negative as operating conditions worsen and the government confronts a potential downgrade to its own AAA rating.
Credit ratings affect the cost of debt, with the big four some of the only banks in the world rated AA-. But under a regulatory change in 2014, the capital benefit banks derived from issuing debt through their wealth management subsidiaries is being phased out by the end of next year, a key driver behind NAB’s overhaul of its wealth operations.
Along with higher funding costs, slowing credit growth and more impairments, a major headwind for the banks is rising regulatory capital requirements.
But in a detailed report on the potential impact from the looming “Basel IV” global reforms, Deutsche Bank analysts yesterday claimed the big four would probably be able to organically generate enough capital and avoid having to launch big equity -raisings.
To help offset the hit to returns from stricter capital rules, NAB last year sold 80 per cent of its life insurance arm to Japan’s Nippon Life for $2.4 billion. ANZ is also reviewing its wealth operations.
S&P said that while CBA and Westpac were unlikely to exit their operations, ANZ could sell OnePath Life in the “near term”.
“We have taken into account repeated market reports in relation to ANZ’s plans to sell its wealth and insurance businesses, as well as increased focus within the ANZ group to rationalise its business lines and improved ¬efficiency in capital allocation,” S&P said.
S&P noted that the Australian Prudential Regulation Authority and Reserve Bank of New Zealand were increasing the scrutiny of life insurance and the risk of contagion in conglomerates operating across vast banking and wealth management operations.
Reserve Bank of Australia research released last week noted similar concerns, claiming losses incurred by wealth subsidiaries can drain a parent group’s capital levels and banks can overrely on the smaller divisions for funding.