Standard & Poor's is lowering the credit ratings of 23 Australian financial institutions including AMP, Bank of Queensland and Bendigo and Adelaide Bank due to what it said is an increased chance of a sharp fall in property prices.
Auswide, MyState, Newcastle Permanent, Qudos and Rural Bank are also among the lenders to have their ratings cut by one notch, as S&P acted on concerns about record household debt and the continuing rise in Sydney and Melbourne property prices.
The ratings agency, whose decisions help determine how much lenders pay for the funds they need to make loans, said on Monday that private sector debt would hit 136 per cent of GDP next month.
The "too big to fail" quartet of Commonwealth Bank, Westpac, ANZ and National Australia Bank were not included in the widespread downgrade because of S&P's assumption that the government would support them if necessary.
"We believe the risk of a sharp correction in property prices has increased," S&P said in a statement.
"We consider that if this downside scenario were to occur, all financial institutions operating in Australia are likely to incur significantly greater credit losses than at present."
Property prices fell one per cent in Melbourne and 0.4 per cent in Sydney in the week to May 21, according to CoreLogic data released Monday, but are still up 12 and 11 per cent respectively on the same time last year.
S&P said the outlook for Australian banks remained relatively benign by global standards but that economic risks had nonetheless increased along with soaring house prices.
"With residential home loans securing about two-thirds of banks' lending assets, the impact of such a scenario on financial institutions would be amplified by the Australian economy's external weaknesses, in particular its persistent current account deficits and high level of external debt," Standard & Poor's said.
However, S&P said intervention by regulators should head off the worst case scenario of a market crash.
The Australian Prudential Regulation Authority recently told lenders to limit higher risk interest-only loans to 30 per cent of new residential mortgages.
"We consider that recent and possible further actions by the Australian authorities should aid in an unwinding of the imbalances in an orderly fashion, as has generally been the case in the past several cycles in Australia," S&P said.
"This is most likely to occur through slower growth - or even a mild drop - in property prices over the next two years, without causing any significant increase in credit losses incurred by the Australian banks."
Bendigo and Adelaide Bank acknowledged the downgrade in a statement to the Australian Securities Exchange.
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