S&P Flags Upgrade of 17 Banks but Potential Downgrade of the Majors

Standard and Poor’s Ratings Agency (S&P) completed its regular review of Australia’s Banking Industry Country Risk Assessment (BICRA) in April.  S&P’s view is the Australian banking system’s industry risk profile has improved stating “a one-in-three possibility that in the next two years we will assess our industry risk score within our BICRA for Australia to have improved by one category. We believe that the Australian banking system’s funding profile has been improving in the past 10 years on the back of growing customer deposits and falling offshore borrowings. We consider that the stronger systemwide funding metrics could be sustained despite a likely modest weakening in the next three years as the COVID-19 driven rise in customer deposits in 2020 unwinds and the Reserve Bank of Australia’s term-funding facility matures”.

S&P revised its ratings outlooks on 17 Australian financial institutions to positive from stable because if the BICRA is improved this will result in a ratings upgrade for these ADIs. The positive ratings outlook reflects that this has not yet occurred, but has a one in three chance of occurring if the positive economic trends continue. Of note, Moody’s Investor Service and Fitch Ratings already assess many of the ADIs S&P has placed on positive outlook one notch higher than S&P so an upgrade by S&P would in most cases bring the three ratings agencies into better alignment than they are currently.

S&P also affirmed its ratings on 12 other financial institutions with outlooks unchanged.  This includes the four major Australian banks (ANZ, CBA, NAB, Westpac) rated ‘AA-/A-1+’ by S&P and Macquarie Bank rated ‘A+/A-1’.   S&P said the ratings outlook continues to be negative for these five banks, reflective of the ratings outlook for the sovereign (Australian Government). S&P announced “The negative outlooks mirror that on Australia and reflect a one-in-three likelihood that we will lower our ratings on these banks [Macquarie and the Four Majors] in the next two years.” 

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