It's an 'happy new year' all around this morning. Except, apparently, from Standard and Poors who, according to Banking Day are about to downgrade our financial system:
Persistently high rates of credit growth relative to GDP and seemingly high property prices could filter into lower credit ratings for banks as Standard & Poor’s revises its approach to credit analysis.
Amid numerous recent reviews of methods applied by the ratings agencies, in light of the credit shock, one S&P review is producing results that will demand attention by investors in bank debt and other securities.
On Friday, S&P published a series of papers on its revised criteria for rating banks, and on which it seeks comment by early March.
While S&P noted, in its media release, that the proposals “would have a modest impact” on banks, changes in ratings of one notch or more (and both up and down) are in prospect.
In the case of Australian banks the risk of a ratings change appears to be a downside one.
One of the papers summarises S&P’s latest work on its “Banking Industry Country Risk Assessment” or BICRA score. These scores range from one, the safest, to 10, the riskiest.
At present, S&P includes Australia’s banking industry as one of six banking markets scored as a “one”.
Under the new approach, the S&P BICRA score for Australia’s banking industry is, tentatively, a “two”.
Banking Day is unsure how this national financial system downgrade will affect individual bank ratings but it doesn't make a lot of sense to downgrade a system then endorse its main parts. Looks like funding costs are going up again with all that that entails.
This blogger has obtained the preliminary assessment as well as the new methodolgy (find them below). See page 4 of the first document for the pending BICRA scores.
S&P Preliminary BICRA in 23 Countries Jan 6 2011 (1)
S&P FI RfC Methodology for Determining BICRA May 13 2010 (1)