The ratings agency Fitch has cut the credit rating of three of the big four Australian banks by a notch to AA-minus largely as a result of their heavy reliance on offshore borrowing to fund their lending book.
Fitch cut the ratings of Commonwealth Bank of Australia (CBA.AX), National Australia Bank (NAB.AX) and Westpac Banking Corporation (WBC.AX) by one notch to AA-.
The rating for Australia and New Zealand Banking (ANZ.AX), already at AA-, remained unchanged.
Fitch said that inspite of the rating cut, the four biggest banks ofAustraliawere among the strongest in the world, on most parameters, and therefore their ratings were kept in an ‘AA’ range.
According to Fitch, the wholesale funding that made up about 40 per cent of total Australian bank funding, was heavily dependent on offshore component, that constituents about 60 per cent, and was the primary source of concern.
“The downgrades reflect the weaker funding profile of the major Australian banks relative to similarly rated international peers,” Fitch said in a statement.
“Despite some improvement since 2008, all four banks retain a reliance on wholesale funding, particularly from offshore markets,” the agency said.
“This funding profile leaves the banks susceptible to dislocation in international wholesale funding markets,” Fitch said.
“Factors such as Australia’s high household debt levels, elevated house prices and increasing reliance on Asia for trade may all impact this confidence, particularly if economic conditions in the region were to deteriorate significantly.” it said.
The ratings agency however said that the offshore exposure was well-managed by the banks, which made sure the portfolio is diversified by geography, product, investor and maturity. The agency said that another positive was the introduction of covered bonds for Australian banks that helped in further diversification.
The rating cut should make it increasingly difficult for the banks to fund future borrowing costs for banks.
Fitch’s move to downgrade the Australian banks follows a similar move by Standard & Poor’s Ratings Services, that late last year, cut the ratings on five Australian banks as a result of negative changes in the criteria it uses to assess risk. Each of the banks was cut one notch to AA minus, the fourth highest credit rating on S&P’s scale.
Australian banks, which rely on offshore wholesale debt markets for around 40% of their funding, have been hit hard by the European debt crisis, which has significantly increased the cost of such debt.
Australia’s banks, despite the downgrade, have some of the highest credit ratings in the world.