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Monday, May 22, 2017

S&P downgrades banks' credit rating on property crash risk but big four escape

By Carrington Clarke Posted yesterday at 5:33pm Photo: S&P believes high house price growth in recent years has left banks vulnerable. (ABC News: Giulio Saggin) Related Story: AAA credit rating safe, for now, as S&P reaffirms Related Story: Who will bear the cost of the bank tax? Related Story: Will more housing drive down prices? Map: Australia Ratings agency S&P Global has downgraded almost all financial institutions in Australia because they face an "increased risk of a sharp correction in property prices". Twenty-three institutions, including AMP, Bank of Queensland, Bendigo and Adelaide Bank and Credit Union Australia, received downgrades to their stand-alone credit profiles. Credit ratings downgrades can force up the cost of borrowing for financial institutions which in turn can be passed onto customers. S&P said "economic imbalances in Australia have increased due to strong growth in private sector debt and residential property prices in the past four years". Effectively, S&P believes high house price growth in recent years has left banks vulnerable and made it less likely they can pay out their debts in the future. The ratings agency said Australian financial institutions were particularly susceptible to a housing correction with "residential home loans securing two-thirds of banks' lending assets" and "the impact of such a scenario on financial institutions would be amplified by the Australian economy's external weaknesses, in particular its persistent current account deficits and high level of external debt". Who will pay the bank tax? The Government says the banks can "absorb" the tax, but what does that actually mean? The "big four" banks, however, managed to escape a downgrade because S&P believes they are likely to receive "timely financial support from the Australian Government" if there is a housing crash. S&P believes the big banks are likely to receive preferential treatment from the Government if the housing market were to crash. The analysis comes at a time when the Government is attempting to impose a new levy on the big banks which is in part justified by the backing the Government gives to the big four. Despite the downgrade and the view that the chance of a sharp correction in house prices has increased, S&P says the "outlook for Australian banks remains relatively benign by global standards". Topics: banking, business-economics-and-finance, housing-industry, consumer-finance, australia

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