Govt support for banks ‘may reduce’, says S&P Global Ratings

S&P is set to keep a negative outlook on bank ratings until it gets more clarity on the government’s commitment.

Piggy banks with the logos of the big four banks (from top) Commonwealth, National, Westpac and ANZ in a race, for The Deal magazine, 07/2009. Pic. Vanessa Hunter Pic. Hunter Vanessa

The Australian government stands ready to back the big banks in the event of a crisis, although there is a one-in-three chance that government support will reduce as regulators boost capital protection measures.

That is the view of S&P Global Ratings, in a report released on Tuesday, titled “Australian Government Support For Banks: Will There Be More Twists In The Tale?”

S&P said the ratings of the major banks were likely to remain on negative outlook until “sufficient clarity” was gained on government’s commitment to rescuing banks and a new regulatory framework being put in place by the Australian Prudential Regulation Authority.

S&P’s confidence in the Australian government’s support, though, is linked to its view that the interconnectedness of the major four banks poses “contagion risk” for the group and the broader economy if one were to stumble.

“Australian authorities continue to hold a pragmatic view that government support for the systemically important banks remains a preferred option to maintain financial system and economic stability,” S&P credit analyst Sharad Jain said.

He added that the existing or proposed capital framework “does not hinder” government support.

APRA’s proposed capital changes — which were outlined in November and are expected to be formalised in coming months — would see banks boost their capital buffers by up to 5 percentage points to limit taxpayer bailouts in the event of a collapse.

But the proposed rules have already spurred some criticism from the big four banks, which estimate they would need to issue $75 billion in tier-two bonds between them to meet the requirements.

S&P expects the Australian government will remain “highly supportive” of systemically important banks even if APRA introduces the new capital measures as proposed in November.

“In our base case, we expect that the Australian government will remain highly supportive toward the systemically important private sector banks. At the same time, we see some ambiguity in future policy direction on this matter,” the report said.

“Consequently, we have our ratings on the Australian major banks on negative outlooks reflecting our most likely alternative scenario — which we consider has a one-in-three chance of occurring over the next two years — that the Australian government supportiveness will diminish to supportive from highly supportive.”

Any downgrade in a bank’s credit rating would prompt a rise in funding costs, meaning investors are closely watching how the situation pans out.

The report said if S&P downgraded its view on Australian government support it would lower issuer credit ratings and senior debt issue ratings on all four major banks by one notch.

The Australian government sits alongside China, India, Japan, Qatar, Saudi Arabia, Singapore, and the United Arab Emirates on S&P’s highly supportive scale.

In the uncertain S&P government support ranking is the United States, the European Union and European Free Trade association member states, while Brazil, Canada, Hong Kong, Israel, Mexico, and Russia belong to the mid-tier where governments are deemed supportive.

While highlighting that the Australian banking industry is highly concentrated, S&P said the nation had not faced a major banking crisis since the early 1990s.

“The track record suggests that the authorities have taken prompt and decisive action to support banks, to the extent it has been needed,” the report said, citing the government guarantee for customer deposits and other measures taken to support stability during the global financial crisis.