S&P Raises Australia’s Banking Industry Country Risk Assessment

Standard and Poor’s ratings agency (S&P) completed its regular review of Australia’s Banking Industry Country Risk Assessment (BICRA) in October 2019. BICRA is a two dimensional matrix reflecting S&P’s macro analysis of the economic and industry risk of a country giving each a score between 1 and 10 to place each country at a particular point on the matrix that corresponds to the Anchor Stand Alone Credit Profile (Anchor SACP) for all banks or ADI’s domiciled in that country. 

The Anchor SACP is then adjusted up or down depending on the individual ADI’s business position, capital and earnings, risk position, funding and liquidity.  This produces the ADI’s Stand Alone Credit Profile (SACP).  This SACP is then upgraded to the final rating assigned to the ADI if there is any degree of external support; either from the sovereign government or other entities within its business group, or the ADI has additional amounts of loss absorbing capital beyond those considered normal.

S&P regularly reviews the BICRA for Australia and has made three changes to it in the last two and a half years. Prior to May 2017, S&P assessed Australia as a “3” for economic risk and a “2” for industry risk.  However in May 2017, S&P downgraded the economic risk for Australia from a “3” to a “4” as shown by the green arrow in the diagram below.  In June 2018, S&P downgraded the industry risk from a “2” to a “3” as shown by the orange arrow and most recently in October 2019, S&P upgraded its economic risk assessment of Australia to a “3” from a “4” as shown by the blue arrow.  S&P said this latest change was reflective of “the reduced economic risks we see in the Australian banking system due to an orderly correction in national house prices and modest growth in private debt in the past two years”.

As can be seen the only change caused to the Anchor SACP for Australian ADI’s was the first downgrade in May 2017 when the anchor moved from a- to bbb+.  As per S&P’s methodology, this meant every ADI in Australia was downgraded by one notch, although S&P spared some ADI’s as they upgraded other factors specific to those ADI’s at the time.  Most notably, the four major banks’ ratings were left unchanged as S&P increased their assessment of the level of sovereign support from the Federal Government from two notches to three notches, meaning the major banks retained their AA- rating despite their SACP falling from a to a-. In total, 22 Australian ADI’s were downgraded in May 2017 as a result of the change to the BICRA.

Following the latest revision in October 2019, S&P’s assessment of the Australian banking economic and industry position is the most favourable it has been since May 2017 and any further upgrade (a move from a “3” to a “2” in either economic or industry risk) will cause widespread ratings upgrades of individual ADI’s. In contrast, a deterioration in either economic or industry conditions will have to amount to two levels to cause a downgrade to individual ADI’s (either a move from a “3” to a “5” in either economic or industry risk, or a move to a “4” for both).

Amicus believes any upgrade is unlikely to affect the major banks however. This is because in S&P’s October 2019 review, it upgraded the SACP of the major banks due to other factors while simultaneously downgrading the sovereign support from three notches to two notches to keep the senior debt ratings at AA-; although the ratings on the major banks’ hybrids and subordinated debt were raised by one notch.

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