S&P downgrades outlook for banks
S&P has revised its outlook on each of the four major Australian banks and Macquarie Bank from stable to negative.
The assessment follows the rating agency’s decision to downgrade the outlook for the Australian government to negative of the back of its recently announced stimulus in response to COVID-19. S&P expects the fiscal profile to weaken as a result.
S&P considers that a lower rating on the commonwealth government “would reflect slightly reduced financial capacity to provide timely financial support to these systemically important financial institutions, if needed”.
However, while S&P has affirmed its current ratings on the banks and follows its recent assessment that the sector had significant headroom to confront current challenges.
The firm said “the negative outlook reflects a one-in-three likelihood that we will lower our long-term rating on these banks in the next two years”.
In its base case, S&P said that despite a significant falling interest and fee income, earnings of these banks in the next two years, they “will remain sufficient to absorb the increase in credit losses due to the COVID-19 outbreak and containment measures”.
Despite the revised outlook, S&P added that it expects that the absolute amount of capital held by these banks will not reduce.
The firm noted that strong and timely monetary support has alleviated funding and liquidity risks to the banks.
S&P forecasts a strong economic rebound toward the end of calendar 2020 following a significant downturn.
“We also believe that the likelihood of timely financial support from the Australian government, if needed, remains high.”
This is why the stand-alone credit profile of the banks remain unchanged.
On Tuesday, credit rating agency Fitch downgraded Australia's big four banks to A+ from AA-.