Australia's banks downgraded by S&P

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INVESTMENT bank Macquarie Group was hit with a two-notch cut to its credit rating in a surprise move last night, as the big four were also downgraded.

Standard & Poor's, which measures credit risk, put the ASX-listed investment bank rating at two notches above junk-grade status. While the rating agency maintained a stable A- rating on Macquarie Bank, the Group was hit with the two-step downgrade from A-, through BBB+ to settle at BBB with a stable outlook.

The rating measures are important in financial markets as a measure of credit and counterparty risk. The lower the ratings, the higher the funding costs are for banks -- though S&P and other ratings agencies continue to try to restore their own credibility in the marketplace after failing to properly assess the credit risk of banks and finance houses during the global financial crisis in 2008.



As predicted in The Australian yesterday, S&P also downgraded the big four Australian banks last night -- the Commonwealth, NAB, Westpac and ANZ -- one notch to AA- from AA, reflecting new ratings criteria behind the way S&P assesses risk.


The move is expected to have little impact on the big four's funding costs -- which have been rising sharply in any case lately as credit markets around the world tighten -- but it adds to the negative sentiment among investors thanks to the rolling European sovereign debt crisis.

Yesterday's move by S&P comes despite rival ratings firm Moody's giving a tick to the big four banks; the agency saying it would keep the top four banks on a "stable outlook" with their coveted AA ratings.

But the Macquarie Group action will likely prompt the most discussion in financial markets today; S&P noting that while Macquarie's position was adequate and its operations diversified relative to its size, "many markets in which Macquarie operates are inherently complex and volatile".

"This has a constraining effect on our view of Macquarie's business stability, and in turn our overall view of its business position."

It said it viewed the group's strategy as "sound overall" as the company made a strategic shift following the global financial crisis "toward broadening its business base and reducing its reliance on equity markets".

The Australian