S&P just cut the credit ratings of 23 Australian financial institutions over property market risk

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Credit ratings agency Standard & Poors has cut the ratings of 23 Australian financial institutions including AMP, Bendigo and Adelaide and Bank of Queensland citing the risk of a sharp fall in property prices.

Mortgage lenders in Australia faced a surge in bad debts in the event of a sharp correction in property prices given household debt is already high, S&P said.

In the event of a sudden property market correction “all financial institutions operating in Australia are likely to incur significantly greater credit losses than present,” the credit ratings agency said in a statement.

Ratings on the four largest lenders — ANZ, CBA, NAB and Westpac– and Macquarie were not revised, however.

Australia’s runaway property market is showing signs of cooling with Sydney and Melbourne home prices both starting to slip, according to research firm CoreLogic.

Banks are also tightening lending to investors amid a clampdown by regulators to dampen speculation. Investors were behind Sydney home prices doubling from their 2009 levels.

“To reflect the increased risk, we have lowered our assessment of the stand-alone credit profiles of almost all financial institutions operating in Australia,” S&P said.

“With residential home loans securing about two-thirds of banks’ lending assets, 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, ” it said.

AMP was cut from A+ with a negative outlook to A with a stable outlook, BOQ has been cut from A- with a negative outlook to BBB+ with a stable outlook and Bendigo and Adelaide Bank has also been cut from A- with a negative outlook to BBB+ with a stable outlook.

The outlook for Australian banks as a whole was relatively benign compared to international peers, the ratings agency said.

While recent regulatory action should lead to an orderly unwind of risks without causing any “significant increase”in credit losses, S&P said that until that occurs the Australia banking system in Australia remains exposed to “elevated risks of a sharp
correction in property prices and its consequence.”

A short while ago, shares in BOQ dropped 0.5%, while Bendigo & Adelaide Bank slid 1.3%. AMP rose 0.4%. The broader S&P/ASX200 index climbed 0.7% led by miners.

Here’s a list of the companies that were cut by S&P

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