Big four banks dragged into S&P’s outlook downgrade

The big four banks have been dragged into Standard & Poor’s mass ratings outlook revision.

Australia’s big four banks have been dragged into today’s mass outlook revision from Standard & Poor’s, with the ratings agency putting them on ‘negative’ watch this afternoon.

The move is a direct response to this morning’s shift to a ‘negative’ outlook for Commonwealth debt as the explicit government guarantee afforded to the big four sees them directly impacted by the federal ratings.

It also follows the shift from a ‘stable’ to ‘negative’ outlook for the debt of the Victorian, New South Wales and ACT Governments.

The major banks – ANZ, Commonwealth Bank, National Australia Bank and Westpac – all had their ‘AA-’ ratings reaffirmed despite the murkier outlook.

The ratings agency warned it would lower the ratings on the banks by one notch to ‘A+’ should it end up reducing the nation’s sovereign debt rating, assuming no material change in the banks’ financial positions beforehand.

“The negative outlooks on these banks reflect our view that the ratings benefit from government support and that we would expect to downgrade these entities if we lower the long-term local currency sovereign credit rating on Australia,” S&P said.

“We have not changed our view of the standalone credit profiles of the Australian major banks or their rated group subsidiaries or our view of the unsupported group credit profile of these banking groups.”

Macquarie Bank’s ‘stable’ outlook was unaffected, S&P added.

Earlier, S&P served as the first major ratings agency to place Australia’s prized ‘AAA’ sovereign debt rating on ‘negative’ watch as it said there was a one-in-three chance of a cut of the rating to AA+ in the next two years.

The decision was made in light of the uncertain election result, which S&P feared would slow the push toward a budget surplus in 2021.

“Given the outcome of the July 2 double-dissolution election, in which neither of the traditional governing parties may command a majority in either house, we believe fiscal consolidation may be further postponed,” the ratings agency said.

In that release S&P had labelled the nation’s banking system as “one of the strongest globally”.

Investors have been fretting over the potential for a credit rating downgrade since the election last weekend, with a risk seen to bank margins should such a circumstance eventuate.

“Banks are where the stress can be seen, and traders and investors are clearly stating that funding costs are likely to go up as a consequence of any potential rating change,” IG chief markets strategist Chris Weston said.

“This could naturally have an impact on margins, although the banks seem fairly well prepared for this and have been active in the funding markets in the last 12 months.”

Capital Economics chief Australia economist Paul Dales added the borrowing costs risks are not as great as the market seems to believe.

“Fears that a downgrade will raise the borrowing costs of the Federal Government, the states and the banks are overdone,” he said.

“The whims of the ratings agencies will play second fiddle to the more powerful economic forces of subdued GDP growth, low inflation and low official interest rates that will keep borrowing costs low throughout the economy.”

The S&P statement on the banks came just as markets were closing for the day, with the big four mostly ending higher through a roller-coaster session.

ANZ added 0.4 per cent, CBA lifted 0.7 per cent, Westpac rose 0.5 per cent, while NAB bucked the trend to slide 0.2 per cent. Ahead of the announcement on the federal ratings outlook the big four all traded up over 1 per cent.

In a statement acknowledging the decision, ANZ said the shift in outlook did not impact the ratings of its hybrid or subordinated debt issued.