Earlier today, S&P Global Ratings revised its outlooks on 17 Australian financial institutions to positive and affirmed its ratings on 12 others with outlooks unchanged (see "Ratings On Australian Major Banks And Macquarie Affirmed As Systemwide Risks Ease; Outlooks Remain Negative," "Outlooks On Two Australian Regional Banks Revised To Positive On Easing Systemwide Risks," and "Outlooks On 14 Australian Mutual Financial Institutions Revised To Positive On Reducing Systemwide Risks," all published today.) These rating actions reflect our opinion that systemwide risks are reducing. Notably, however, our outlooks on the four major Australian banks and Macquarie Bank Ltd. remain negative.

In this credit FAQ, we explain the rationale for our rating actions and examine other emerging issues we consider important when assessing the creditworthiness of Australian financial institutions.

Frequently Asked Questions

Why did you revise the outlooks on 17 Australian financial institutions to positive?

The rating actions reflect our view that the Australian banking industry risk trend--within our Banking Industry Country Risk Assessment (BICRA)--is now positive. We see a one-in-three possibility that in the next two years we will assess our industry risk score within our BICRA for Australia to have improved by one category. We believe that the Australian banking system's funding profile has been improving in the past 10 years on the back of growing customer deposits and falling offshore borrowings (see chart 1). We consider that the stronger systemwide funding metrics could be sustained despite a likely modest weakening in the next three years as the COVID-19 driven rise in customer deposits in 2020 unwinds and the Reserve Bank of Australia's (RBA) term-funding facility matures.

Chart 1

Why, then, do the outlooks on the four major Australian banks and Macquarie Bank remain negative?

The negative outlook on Australia (AAA/Negative/A-1+) continues to drive our negative outlooks on the four major Australian banks (Australia and New Zealand Banking Group Ltd., Commonwealth Bank of Australia, National Australia Bank Ltd., and Westpac Banking Corp.) and Macquarie Bank Ltd. We expect to lower our long-term issuer credit ratings on these five banks if we were to lower our long-term local currency sovereign credit rating on Australia to 'AA+', all else unchanged (see scenario 2 in table 1). We consider that a lower rating on the sovereign would reflect slightly reduced financial capacity to provide extraordinary financial support to the five systemically important institutions in Australia, if needed.

Table 1

Why do the outlooks on four banks remain stable: Australian Unity Bank Ltd., HSBC Bank Australia Ltd., ING Bank (Australia) Ltd., and Members Banking Group?

Our ratings on these four banks largely reflect our expectation of timely extraordinary support from their stronger credit quality parents, if needed. We believe the creditworthiness of these banks' parent groups would remain unchanged in the next two years. In particular, we consider that these groups' credit profiles would be generally unaffected by the factors that could drive an improvement in our industry risk score for Australia.. Consequently, we have maintained stable outlooks on these four banks.

Similarly, our ratings and outlooks on J.P. Morgan Securities Australia Ltd. and Goldman Sachs Financial Markets Pty Ltd.--Australian subsidiaries of U.S.-based financial institutions--remain linked to our ratings on their respective parents, and are consequently unaffected by today's announcements related to our BICRA for Australia.

Can you explain your outlooks on AMP Bank, Citigroup Pty Ltd., ME Bank, and Suncorp-Metway Ltd.?

Banks-specific factors--rather than systemic factors--drive our current outlooks on these four banks:

AMP Bank Ltd.

The outlook on AMP Bank Ltd. is stable. We see a one-in-three possibility that AMP Bank's stand-alone credit profile (SACP) could improve in the next two years. Nevertheless, we expect that such an improvement would be insufficient to lift the overall group credit profile in that scenario. Consequently, our rating on AMP Bank is likely to remain unchanged, at the same level as the group credit profile. In this assessment, we take into account AMP's recently announced plan to demerge AMP Capital's private markets businesses.

Citigroup Pty Ltd. (CPL)

The ratings on CPL are on CreditWatch with negative implications. CPL's parent, Citigroup Inc. (Citi), recently announced its intention to exit the Australian consumer banking business, which constitutes the bulk of CPL's operations. Consequently, the likelihood that CPL could receive extraordinary support from the group, if needed, could decline. We expect to resolve the CreditWatch on CPL in the next three months based on an assessment of CPL's SACP and our understanding of the likely details of Citi's exit from consumer banking in Australia.

ME Bank

The ratings on ME Bank are on CreditWatch with positive implications. We expect to resolve the CreditWatch in the second half of calendar 2021 because we expect either of the following outcomes by then: i) The acquisition by Bank of Queensland Ltd. (BoQ) is completed, or ii) a confirmation that the acquisition will not proceed. We will monitor any developments related to the transaction, including the receipt of regulatory approval.

We expect to raise our long-term ratings on ME Bank by one notch, equalizing them with the ratings on BoQ, if the transaction is completed as proposed. In the longer term, we may raise our ratings on ME Bank by another notch if we upgrade BoQ, which is currently on positive outlook.

We expect to affirm our ratings on ME Bank with a positive outlook should the acquisition by BoQ not proceed. If the acquisition does not proceed and we view that Australian banks face reduced industry risks, we expect to raise our long-term issuer credit rating on ME Bank by one notch to 'BBB+', all else being equal.

Suncorp-Metway Ltd.

The positive outlook on Suncorp-Metway Ltd. (SML) mirrors that on the core operating entities of Suncorp Group Ltd. (SGL; core entities rated A+/Positive). We see a one-in-three possibility that the SGL group's creditworthiness could improve in the next two years. We expect to maintain the long-term rating on SML at the same level as that on the core operating entities of SGL. This recognizes the bank's strategic importance to the broader group and our expectation that SGL will support SML under any foreseeable circumstance.

Isn't it unusual for your ratings or outlooks on many banks to remain unchanged despite changes in systemwide risk assessments?

We consider that the likelihood of extraordinary support from the parent group or the government can dampen volatility in a bank's creditworthiness against modest changes in its SACP--whether driven by bank specific factors or systemwide factors. For example--reflecting similar factors--we did not previously downgrade the four major Australian banks and a few other banks when we lowered our ratings on many Australian financial institutions in 2017 to reflect increased systemwide risks (see "Credit FAQ: What's Behind Today's Downgrades Of 23 Australian Financial Institutions?," and "Ratings On 23 Australian Financial Institutions Lowered On Buildup Of Economic Imbalances," both published on May 22, 2017).

What would be the triggers for upgrading the 17 Australian financial institutions on which you revised your outlook to positive today?

We expect to raise our long-term issuer credit rating on each of these 17 financial institutions by one notch if we form a view that industry risks facing Australian banks have reduced sustainably, all else being equal. This could occur if we believed that the stronger systemwide funding metrics could be sustained despite a likely modest weakening in the next three years as the COVID-19 driven rise in customer deposits in 2020 unwinds and the RBA's term-funding facility matures. Conversely, a material deterioration in Australian banks' earnings capacity or emergence of significant weaknesses regarding systemwide regulation and supervision, risk appetite, risk management, or governance could impede an improvement in industry risks.

How would the scenario of an improved industry risk score affect your ratings on the four major Australian banks and Macquarie Bank?

If we form a view that industry risks facing Australian banks have reduced sustainably, all else equal, we expect to (see scenario 3 in table 1):

• Revise our outlooks on the five banks and their core operating subsidiaries to stable.
• Improve our assessment of the SACPs of each of the five banks by one notch.
• Maintain our issuer credit ratings on each of the five banks, reducing the uplift in our issuer credit ratings above the banks' SACPs to one-notch from two notches. This uplift reflects our assessment of the likelihood of extraordinary support from the Australian sovereign.
• Raise by one-notch our ratings on each of the Tier-1 and Tier-2 regulatory capital instruments issued by the five banks, in line with the revision in the respective bank's SACP.

An improved industry risk score would also offset downside risks from a potential sovereign downgrade to our ratings on the five banks (see scenario 4 in table 1).

Why have you revised your economic risk trend to stable within your BICRA for Australia?

In our opinion, the downside to economic risks facing Australian financial institutions due to the COVID-19 outbreak and containment measures have eased. Australia is recovering faster than most advanced economies after the COVID-19 pandemic and subsequent government lockdown delivered an economic shock.

Australia has to date successfully contained the spread of COVID-19 after a second wave in Victoria, the country's second most populous state, in 2020. The national economy is now recovering strongly. This follows the first recession in the country in almost 30 years, triggered by the COVID-19 outbreak and containment measures.

The government's fiscal stimulus supported the economy after COVID-19 hit and is helping the subsequent recovery. We believe that the reduction in fiscal support from the government and ending of bank loan deferrals will not derail the economic recovery.

What level of credit losses do you expect to see in the medium term?

We forecast banking systemwide credit losses in the next two years to remain at about 30 basis points (bps)-35 bps of gross loans, broadly in line with our expected long-term average for Australian banks. We consider that the economic recovery, falling unemployment, improved consumer and business sentiment, and low interest rates should help in keeping the loss levels low relative to many other countries. We expect that only a small proportion of businesses and households will struggle to meet their financial obligations as the moratorium on debt servicing ends, and the fiscal support from the government is being progressively reduced. We note that as of Feb. 28, 2021, loans under repayment deferrals have progressively reduced to about 0.5% of gross loans and advances compared with about 10% at the peak in mid 2020.

Does that mean that you no longer see downside risks from COVID-19?

We consider that COVID-19 continues to pose risks to the Australian economy and financial system stability. A recurrence of COVID-19 infections in large numbers, and a consequent deep and prolonged economic recession, would heighten the risks that Australian banks face, but we now see this scenario as unlikely.

What is your view on the risks to Australian banks from rising house prices?

In our opinion, one of the key vulnerabilities of Australian banks remains the risk of a rapid rise in credit losses fueled by resurgent house prices and high household debt. Property price growth has resumed following a modest correction in 2020 after the outbreak of COVID-19.

We forecast house prices to increase by about 10% in the next year. Strong consumer sentiment, a sound economic outlook, improving employment conditions, and low interest rates will continue to drive house prices despite travel restrictions continuing to impede immigration-driven population growth, in our view. In addition, we believe that the long-term gap between growth in housing supply compared with demand will persist-- especially in Melbourne and Sydney, which attract most of the migrants.

That said, we expect the regulators to take timely action to mitigate risks to financial system stability from a house price resurgence and high household debt.

S&P Global Ratings believes there remains high, albeit moderating, uncertainty about the evolution of the coronavirus pandemic and its economic effects. Vaccine production is ramping up and rollouts are gathering pace around the world. Widespread immunization, which will help pave the way for a return to more normal levels of social and economic activity, looks to be achievable by most developed economies by the end of the third quarter. However, some emerging markets may only be able to achieve widespread immunization by year-end or later. We use these assumptions about vaccine timing in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.