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Global jitters see S&P cut Australasian bank credit ratings

Friday 2nd December 2011

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Credit rating downgrades for all Australian and New Zealand trading banks reflect the worsening global economy rather than any weakening in the banks’ own performance, says one of the authors of the KPMG annual survey of the banking sector.

Standard & Poor’s announced the downgrades overnight after applying new rating criteria to financial institutions throughout the Asia-Pacific region. Another major rating agency, Moody’s Investors Service, said the Australasian banking system was “stable”.

“In many ways the banks have become stronger but the rating agencies have looked at the global situation and if it deteriorates further it will be tougher to get funding and the Australasian banks still get a significant amount of funding from offshore,” said John Kensington, head of financial services for KPMG in New Zealand.

“To use a rugby analogy, the team’s better, but so is the opposition, and they’re playing three games a week instead of one, into the wind with the sun in their eyes, on a muddy field.”

Feedback from the finance sector was also that even though they had strengthened their balance sheets to meet credit rating agencies’ demands, the agencies were returning with further demands for capital bolstering.

S&P cut the Australia & New Zealand Banking Group rating to AA-minus from AA with a stable outlook, as was its New Zealand business, ANZ National Bank, UDC Finance and One Path Life. Its One Path Australia unit was lowered to A+ from AA-minus.

Commonwealth Bank of Australia was also cut to AA-minus from AA with a stable outlook, along with its ASB Bank and ASB Finance units. National Bank of Australia and its Bank of New Zealand unit were also downgraded to AA-minus from AA with a stable outlook, as was Westpac Banking Corp and its local unit.

Sydney-based Macquarie Group’s credit rating was lowered by two notches to BBB from AA-minus.

Moody’s said Australia’s banking system is rated as one of the highest in the world, at an average level of Aa2. The ratings reflected the banks’ “strong risk-adjusted profitability and franchise power after a period of consolidation,” it said in a report.

“While we continue to view the Australian banking system’s relatively high proportion of offshore wholesale funding to be a structural sensitivity, customer deposits have been growing faster than loans as deleveraging continues,” said Moody’s senior vice president Patrick Winsbury.

That’s allowed lenders to reduce their reliance on offshore wholesale funding.

Australia’s lenders also benefit from the nation’s “fundamentally solid” economy, with private consumption set to grow, Moody’s said.

The banks have built “sizeable capital buffers” to absorb any weakness in asset quality, which would help them cope with offshore shocks such as Europe’s sovereign debt crisis, it said.

The reratings also reflected that rating agencies were “extraordinarily nervous” and needed to restore their mana, having been blamed along with regulators and others for failing to head off the global financial crisis, said the chief economist at the Bank of New Zealand, Stephen Toplis.

However, the Australian and New Zealand banking systems were in relatively good shape. “It’s a very very scary world out there and to have a banking system in Australasia positioned where it is, is fantastic,” Toplis said.

“Just be very thankful we live in this part of the world. The absolute may not be great, but the relative position is staggering.”

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