Big bank credit ratings under threat from rising property prices, household debt

Australian Financial Review Feb 28 2017 7:49 PM

Jonathan Shapiro

Australia's banks could have their stand-alone credit ratings cut by Standard & Poor's if household debt outpaces economic growth by 5 percentage points or if house price growth outpaces the inflation rate by more than 4 percentage points.

In a stark warning by the credit rating agency, which already has the major banks' AA- credit ratings on a negative outlook, it said that economic risk was on the rise in Australia, which may force it to downgrade Australia's banks.

The move would not result in an automatic downgrade of the AA-rating as the banks benefit from the so-called "too big to fail" support afforded them by the government, which is rated AAA.

The nation's AAA credit rating was, however, placed on negative outlook in July 2016 and should it be cut, the rating of the banks would fall in sync.

While a cut to the rating appeared imminent late last year, the downgrade threat appears to have eased for now as a strong rebound in commodity prices has boosted national income.

S&P senior bank analyst Sharad Jain said rising private sector debt and house prices were the two key indicators of economic risk that the agency tracked.

While S&P gets monthly updates on private sector debt, its main source for property price trends is from the Australian Bureau of Statistics, which releases data less frequently.

S&P reviews its banking and country risk assessment scores at least once a year with the most recent assessment completed in late October.

Mr Jain said that while economic risk was rising in Australia, it remained relatively low, but he said the economic imbalances needed to be considered in the context of external imbalances.

Australia remains an exporter of capital, predominantly via its banks, which amplified the impact of an internal shock.

The rating agency's comments echo growing concerns among policymakers, including Reserve Bank of Australia governor Philip Lowe, that a build-up in household debt needs to be managed.