Standard and Poor’s (S&P) has extended its negative outlook on banks to a number of smaller financial institutions in Australia.
S&P already has the four major banks on negative, reflecting the outlook of the Australia’s triple-A sovereign rating.
The latest ratings move from a stable outlook adds another 25 financial institutions, including Macquarie Bank, the Bank of Queensland, Bendigo and Adelaide Bank, Credit Union Australia and AMP Bank, to the negative watch.
The ratings agency is worried about rising home prices and growing private debt.
“In our opinion, economic risks facing all financial institutions operating in Australia are rising due to the strong growth in private sector debt and residential property prices in the past four years, notwithstanding some signs of moderation in growth in recent months,” S&P says.
“Our base-case scenario remains that the growth in property prices and private sector debt will moderate and remain at relatively low levels in the next two years.
“However, in our alternative case, we assess that there is a one-in-three chance that the strong growth trend will resume and economic balances will continue to build, which in our view would increase the risks that a sharp correction in property prices could occur.”
In that scenario, credit losses incurred by financial institutions in Australia would be significant.
Private sector debt grew to 139% of GDP in June this year from 118% in 2012, an annual average increase of 5.2 percentage points.
“We believe that in a scenario of rapidly falling house prices, all the Australian financial institutions would be exposed to a drop in operating earnings and a rise in credit losses significantly beyond a level factored in our current ratings,” S&P says.
“A sharp decline in house prices in any country is generally accompanied by a weakening of other key macroeconomic factors, such as unemployment, household expenditure, corporate investments, and total economic activity.”
Here’s debt compared to the growth in housing prices:
S&P sees as unlikely a sharp fall in property prices in the next two years.
“In line with recent trends, we expect that the growth in private sector debt and property prices will moderate and remain at a relatively low level in the next two years,” the agency says.
“We believe that increasing apartment supply in Sydney and Melbourne, regulatory pressures on lending practices and capital, and recent trends — including declining sales volumes in the secondary market — should help moderate the growth in property prices and household debt.”