Standard & Poor’s ratings blow to small banks

The government’s much-hyped competitive boost to second-tier banks from the major-bank liability tax is set to disappear after Standard & Poor’s downgraded 23 domestic financial institutions due to the higher risk of a “sharp correction” in the property market.

The move came as the big four commercial banks released impact statements from the levy showing some $1.4 billion would be raised in the first full year. However, there is a prospect of a revenue shortfall in the hundreds of millions, given their deductions from company tax.

But the regional banks, which are not caught by the levy, expressed shock that the majors had been spared any rating move. Each of the big four banks retained their “AA-” rating.

Bank of Queensland chief executive John Sutton told The Australian he was “perplexed and disappointed” by S&P’s move, which “over time” would erode the competitive advantage from the six-basis-point tax announced in the budget.

“We considered this outcome in our scenario planning but we thought it would be very perverse if we were downgraded and the four majors kept their rating because they’re too big to fail,” Mr Sutton said yesterday. “I find it incredibly odd that the implicit guarantee was worth two notches to the majors’ credit ratings but now it’s been increased to three.”

BoQ will have to pay more for its funding as a result of its one-notch downgrade to BBB-plus, increasing the prospect of an interest rate increase.

Mr Sutton said this was despite the bank’s balance sheet being in “much better shape” than when it was last rated at BBB in 2013.

Also, the bank had very little exposure to the overheated Sydney and Melbourne property markets, which have caused so much concern among regulators, ratings agencies and some investors.

A combination of these factors, along with moves to diversify BoQ’s funding base and significantly lengthen its debt maturities, had resulted in two credit upgrades since 2013.

Mr Sutton said the next big issue for the regionals was the prudential regulator’s midyear discussion paper on the financial system inquiry’s recommendation for local banks to be “unquestionably strong”.

Second-tier lenders are hoping for a tilt of the playing field in their favour through an adjustment in mortgage risk-weights, which currently favour the big banks able to use internal models to calculate risk instead of the regionals’ standardised models.

Bendigo and Adelaide Bank also suffered a downgrade yesterday, from A-minus to BBB-plus, as did Liberty Financial.

Suncorp-Metway, however, was stable at A-plus.

Meanwhile Westpac, Commonwealth Bank, National Australia Bank and ANZ disclosed the impact statements from the tax to the Australian Securities Exchange.

Westpac will be the hardest hit, coughing up $370 million before tax and $260m after tax, followed by NAB ($350m and $245m) and ANZ ($345m and $240m).

Paradoxically for the largest bank, CBA will pay the least ($315m and $220m).

ANZ, which has urged the banks to move on from the tax, continued to be the most conciliatory of the big four.

Through their chairs, the other three banks again turned on the government.

CBA chair Catherine Livingstone said the levy was poorly designed policy, drafted without consultation, and there were deep concerns about the bank’s ability to serve its customers better and continuing to deliver for shareholders and the broader economy.

She also targeted further measures that potentially intrude on the bank’s operations with significant implications for sound corporate governance.

“For example, the fact that regulators will be empowered to override your board calls into question the established, fundamental governance framework which governs publicly listed companies,” Ms Livingstone said.

NAB chair and former Treasury secretary Ken Henry said the bank would continue to “strongly object” to the tax by engaging with shareholders, the broader community, the government and the parliament.

The bank, he said, was encouraging a Senate committee to conduct an inquiry into the tax so Australians could have a deeper understanding of the process behind the tax and how it would work.

“We have also called for the exposure draft legislation to be released for public consultation so the community can have its say. This is an important step for a reform of this scale and nature,” Dr Henry said.

Westpac chairman Lindsay Maxsted said he was disappointed the tax did not apply to foreign banks.

In response to the government’s position that the impost should be “absorbed”, Mr Maxsted said no company could simply absorb a new tax because the impact of higher costs ultimately flowed through to customers, shareholders, suppliers and staff, or a combination of the four.

“No decision has been made on how we respond to the levy,” he said. But as an indication of its impact over the full year if shareholders were to absorb all the pain, Mr Maxsted said the tax would be equivalent to 8c a share, or 4.3 per cent of the dividends paid.


“Standard & Poor’s downgraded 23 domestic financial institutions due to the higher risk of a “sharp correction” in the property market.”

aka..the bubble will pop..the big 5 will survive..the others..maybe not..


~ by seeker401 on May 24, 2017.

One Response to “Standard & Poor’s ratings blow to small banks”

  1. Reblogged this on World Peace Forum.

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