Suncorp-Metway’s Banking Unit Downgraded By S&P
Standard & Poor’s the credit rating agency downgraded Suncorp-Metway’s banking unit last week which will have the effect of increasing its funding cost and placing added pressure on the board of the bancassurance group to divest the unit or merge it with a stronger higher rated rival.
Suncorp’s banking unit was put up for auction at the height of the credit crisis when funding became scarce and the bank’s survival looked increasingly unlikely. The board quickly backtracked after the Kevin Rudd led Government introduced a sovereign backed guarantee on wholesale money and credit market funding and federally insured all deposits.
S&P cut Suncorp’s senior credit rating to A from A+ after deciding that the banking arm was no longer a core part of the group, after the recent attempt to sell it. Its rating on Suncorp’s insurance arm remains unchanged at A+.
Ordinarily ratings to a large degree determine the price issuers must pay when they want to borrow from the bond markets, reflecting the perceived default risk. After the Government initiated its sovereign guarantee, every Australian financial institution wanting to issue debt securities now comes with a sovereign triple A risk rating. Regional banks such as Suncorp with lower credit ratings however are required to pay a fee.
A recent Goldman Sachs JBWere note pointed out that pricing for three-year debt in December “ranged from 100 basis points for ANZ and Westpac to 140 basis points for Suncorp”. Suncorp was unable to provide an estimate last Thursday of any future pricing difference.
“The market has been so volatile during November and December on pricing and . . . there haven’t been deals come to market as yet to know what the new year holds,” a Suncorp spokeswoman said.
Suncorp issued guidance on Friday for a five year Sterling deal, pricing it a 100-110 points over mid swaps. ANZ’s Australian Dollar denominated deal also with a five year maturity priced the same whilst NAB’s and CBA’s three year US Dollar deals priced at 85 and 78 basis points over swaps respectively.
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