S&P Says Australian Banks Could Run Risk Of Ratings Downgrade

Post by Sharat on November 25, 2009 · Under Business News, banking · Comment

Global credit rating agency S&P, says the world’s largest lenders, including Australia’s Big Four, lack sufficient funding to meet their lending exposure and is warning that they run the risk of having their credit ratings downgrades, if they fail to strengthen their balance sheets over the next eighteen months.

S&P’s warning comes after it announced a new method of measurement of bank capital levels, known as the risk adjusted capital ratio, which it says means that most of the world’s largest lenders fail to meet the 8 per cent minimum threshold level.

S&P’s warning contradicts claims made by Australian lenders, who say they are amongst the world’s strongest and best capitalised banks using the more traditional metric of bank capital, the tier-one capital ratio.

Australian lenders, over the last twelve months, have strengthened their balance sheets, raising over $20 billion. This has meant that the Big Four have increased their average tier-one capital ratio to 8.9 per cent from 7.8 per cent a year earlier.

Critics say that the tier-one capital ratio can be misleading because it does not distinguish between low or high risk lending, and the measure has yet to be calculated in a standardized manner internationally.

Australian lenders however, make the argument that their tier-one capital ratios would rise by 2 per cent on average if they began calculating the ratio using UK rules.

S&P’s risk adjusted capital ratio assigns a lower rating to hybrid capital since it behaves more like debt than equity. That has important implications for Australian lenders, because hybrid securities can constitute almost a quarter of their total capital base.

Using its risk adjusted capital ratio S&P reviewed 45 lenders from around the world and found that none of the Australian banks it reviewed met the minimum threshold level it considered to be safe.

S&P reviewed three Australian banks, ANZ had the highest ratio at 7.1 per cent, NAB was next with a ratio of 6.9 per cent followed by CBA which has a ratio of 6.3 per cent.

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