S&P expects banks to cope with a Chinese burn

A hard landing in China while bruising for banks may have only a muted effect on their credit ratings, Standard & Poor's concluded in an analysis released yesterday.

An adverse turn in China's economy is often hypothesised to mean Australia's economy will be badly affected, with a dive in terms of trade and national income that would, in turn, shake business and consumer confidence. This would then, it is thought, lead to a rise in unemployment, a fall in property prices and an escalation in bad debts for banks.

S&P has attempted to provide some rigour to the scenarios that might unfold.

At the worst, the credit rating of the big banks would fall, but only from AA- to A+, S&P said, taking into account clear-cut government support for these banks.

Smaller banks could expect a ratings downgrade of two notches, dragging some of them below investment grade status.

S&P argues that "a soft slowdown in China would likely have a no-to-low impact on Australian financial institution ratings, with few, if any, rating downgrades on Australian financial institutions."

A medium slowdown in China "would also likely have a low impact on Australian financial institution ratings," S&P said.

However, "a severe slowdown in China would likely have a more pronounced impact."

"Under such a scenario, we anticipate that many Australian financial institutions would be impacted by one-or-two notch downgrades."

S&P said it had incorporated, as a base case scenario, a moderate slowdown in growth in its current credit ratings of Australian banks, and that its projection of slower GDP growth in China during 2013 and 2014 "will not have a material impact on the credit metrics of the Australian financial institutions."