S&P Raises Bank Credit Ratings

S&P Raises Bank Credit Ratings

This week, S&P Global announced widespread credit rating upgrades on Australian banks.

It upgraded all bank additional Tier 1 securities, known as hybrids or capital notes, as well as all Tier 2 securities, otherwise called subordinated bond issues. Credit ratings of New Zealand subsidiaries were also raised based on the expectation the parent will support the subsidiary and AT1 and T2 are identical to parent ratings.

Issuer and senior debt credit ratings for the four major banks and Macquarie were unchanged.

Regional banks and 16 mutual banks all had ratings increased by one notch. Payments and data services provider, Cuscal Ltd was also included as was non bank lender, Liberty Financial Ltd.

Liberty Financial was included in the action as it was considered that it would benefit from the broader country risk assessment, ASIC’s increased oversight powers and that non bank mortgages had not been materially impacted despite recent interest rate rises.

Suncorp-Metway Ltd was put on credit watch positive as S&P Global expect the acquisition of its bank by ANZ will go ahead and its credit ratings will reflect ANZ’s credit ratings.

Also read: Australian Interest Rates to Move in 4Q24

In a webinar explaining the upgrades, S&P analysts said they consider Tier 2 capital to be going concern loss capital, that they project $15-$20 billion more will be needed in the next two years and that while they believe there would be capital injections for systematically important banks, if needed, it was an opinion and there was no certainty.

S&P Global Ratings’ financial institution rating framework is based on a number of factors including:

  1. Macroeconomic factors, known as a Banking Industry Country Risk Assessment (BICRA) rating where economic and industry risks are scored.
  2. Financial Institution factors such as business position, capital and earnings, risk position and funding and liquidity are rated.
  3. Extraordinary external support where the potential for government and other support-related factors is considered.

The credit rating upgrades relate to an improved BICRA rating, where it moved from 3 to 2, from low risk to very low risk. The revised rating puts Australia’s risk assessment in line with Hong Kong, Canada and Singapore.

S&P’s assessment included the following assumptions:

  • Low unemployment which will curb bank credit losses
  • Losses estimated to be 0.15% or 15 basis points going forward
  • Modest economic growth
  • Bank earnings to remain strong.
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Elizabeth Moran
Editorial Director
Elizabeth is a nationally-recognised independent expert on fixed income. She has more than 25 years experience in banking and financial institutions in Australia and the UK and has been published in every major Australian newspaper and investment website. Prior to becoming an independent commentator in 2019 she spent more than 10 years as the head of education and research at fixed income broker FIIG Securities. Prior to joining FIIG, Elizabeth worked as an Editor/Analyst for Rapid Ratings a quantitative credit rating agency. She also spent five years in London, three working as a credit rating analyst for NatWest Markets.