Big banks stand by for credit ratings news

New Zealand banks are waiting to hear if they too will have their credit ratings downgraded. Photo / Sarah Ivey

Standard & Poor's has cut the credit ratings of 15 of the world's biggest banks - mostly in Europe and the United States - in the first wave of actions under its new, tougher, ratings criteria.

In January S&P, stung by the spectacular failure of a number of highly rated institutions in the global financial crisis, announced plans to revise its global rating criteria for banks.

The result is a series of ratings revisions on hundreds of the world's banks. The revisions are being released in batches and it expects to report on Australia's big four banks - Westpac, ANZ Bank, National Australia Bank and Commonwealth Bank of Australia - before the middle of next month.

S&P said that JPMorgan Chase & Co, Bank of America Corp, Citigroup Inc, Wells Fargo & Co, Goldman Sachs Group, Morgan Stanley, Barclays Plc, HSBC Holdings, and UBS AG, were among the banks that had their ratings cut by one notch. The agency left the ratings of 20 banks unchanged and raised the ratings of two.

S&P said early this month that it would gradually roll out the updated ratings for more than 750 banking companies worldwide, starting with announcements about the biggest banks.

- REUTERS reported that S&P expected about 20 per cent of all banks would see their ratings drop, while 20 per cent would get higher ratings and 60 per cent would stay the same as a result of the new regime.

S&P's overhaul is part of a broad drive to improve its products and repair its reputation, which was hit hard by having wrongly put triple-A ratings on securities backed by subprime mortgages - the instruments at the centre of the global financial crisis.
On November 10, S&P said it had revised its Banking Industry Country Risk Assessment (BICRA) on New Zealand to group "3" from group "2".

S&P said then that BICRA is scored on a scale from 1 to 10, ranging from the lowest-risk banking systems (group 1) to the highest-risk (group 10). Other countries in BICRA group 3 are Italy, Korea, the UK and the US.

S&P said at the time that it had a generally positive view of the New Zealand economy and the local banking sector.

"In our view, the New Zealand banking industry is supported by restrained risk appetite. In our opinion, the sector has generally been able to prudently price for the risks taken, and has generally not shown tendencies to chase aggressive returns," S&P said.

However, the agency said: "We consider that high dependence on net offshore borrowings - which fund about 42 per cent of domestic customer loans - and limited support from core customer deposits - which fund only about 44 per cent of domestic customer loans - weaken New Zealand's banking system."

The Australian banks and their New Zealand offshoots carry a highly coveted AA rating from S&P, and are among the world's most highly rated institutions.

Early this year, the big four banks' ratings were cut by one notch to Aa2 by S&P's main competitor - Moody's Investors Service - reflecting the agency's view of the Australian banking system's sensitivity to conditions in wholesale funding markets.