Bank ratings change may lead to interest rate rises

AUSTRALIAN banks are likely to unleash out-of-cycle interest rate rises again if Standard & Poor's downgrades the lenders.

money

AUSTRALIAN banks are likely to unleash out-of-cycle rate rises again if Standard & Poor's downgrades the lenders after overhauling its ratings system.

 Analysts say Mortgage customers could bear the brunt when the ratings agency changes how it assesses the credit quality of banks globally, with Australian lenders potentially in the firing line.

Standard & Poor's will revise the criteria it uses to assess banks following a review that has been running for more than year.

It says it does not expect to change its assessment about the health of the broader financial system.

But the agency has warned that the changes "may lead to modest adjustments in some bank ratings", likely late this year.

Banks and other institutions with strong credit ratings can borrow at lower costs than rivals with poor ratings. Australia's major banks are rated among the healthiest in the world despite a widely anticipated move last week by another ratings agency, Moody's, to downgrade them.

But Moody's' cut, albeit to Standard & Poor's' levels, is fuelling speculation that Standard & Poor's will again scrutinise the Australian banks.

If it downgrades Australian banks more aggressively than foreign banks, the domestic lenders will have to pay more for money they borrow overseas to lend to households and businesses.

Analysts say the banks would then lift interest rates beyond any increase in the Reserve Bank's official cash rate to claw back their higher costs.

Nomura analyst Victor German said a downgrade by Standard & Poor's would have far more severe ramifications than the cut carried out last week by Moody's.

"If S&P actually downgrades them, the question will be, how (severely) will they downgrade?" he said. "Currently, the consensus is they will downgrade them by about one notch.

"As long as Australian banks get downgraded together with everyone else, it's less of an issue."

Southern Cross Equities analyst T.S. Lim said that if the Australian banks were downgraded, the interest rate they paid for funding would likely rise by about 0.3 percentage points.

"It's scary to think about," Mr Lim said.