Australia losing AAA rating would spark turn to bank debt, NAB says

[SYDNEY] Australia's biggest banks would find new demand for their debt if the country loses its top credit score.

That's the view of Eva Zileli, head of group funding at the nation's fourth-largest lender by market value, National Australia Bank Ltd. Australian banks receive sovereign support for their credit scores and while a downgrade of the country's AAA rating would force lenders to pay more to tap debt markets, it would also deepen their investor pool as higher-yielding paper lures new investors, she said.

"Fundamentally, the risk profile of the banks hasn't changed but now we're offering a greater return," Ms Zileli said.

"I think that will actually bring more interest into the Aussie domain."

S&P Global Ratings has warned continued inaction around tackling Australia's A$36.5 billion (S$38.82 billion) underlying cash deficit this fiscal year may see the world's 12th-largest economy forfeit its AAA score.

Australia & New Zealand Banking Group Ltd, Commonwealth Bank of Australia, Westpac Banking Corp and NAB would number among the most-affected companies as they rely on strong credit scores to competitively tap offshore wholesale debt markets where they get about a fifth of their funding.

Australia's big four banks raised US$80 billion in overseas debt markets last year, an increase from US$54 billion in 2015, according to data compiled by Bloomberg.

The companies raised a combined A$43.4 billion in the Australian market last year compared with A$27.1 billion in 2015, Bloomberg data shows. They may face a 15-to-20 basis points hike to funding costs both onshore and offshore if their credit ratings were to fall one notch from their current AA- ranking by S&P, according to Citigroup Inc. credit sector specialist Anthony Ip.

Australia is one of just 10 countries worldwide with an AAA rating from both S&P and Moody's Investors Service. While the nation is on track to take the global record for the longest streak of economic growth this year, concerns are rising about a possible housing bubble, growing levels of household debt and stagnant living standards.

Ethical Investing

Potentially losing the AAA rating wouldn't be a big deal for Australia's economy, according to Paul Dales, chief Australian economist at consultancy Capital Economics. When the UK was stripped of its top credit grade in the aftermath of the Brexit vote, investors took the decision in their stride and Australia likely wouldn't be any different, Mr Dales said.

Australia's gross domestic product will likely expand 2.5 per cent this year, compared with the developed economy average of 1.9 per cent, Bloomberg data show. Considering the potential political volatility in Europe from the Brexit negotiations, German and French elections and the rumbling Greek debt crisis, Ms Zileli believes Australian paper will remain attractive.

"We've benefited in terms of a flight to quality," she said.

NAB is also looking to tap investors' appetite for green and socially responsible bonds as it seeks to diversify its lender base. After raising A$500 million through its first five-year note that promotes gender equality in companies, Ms Zileli is exploring new avenues domestically and offshore for ethical funding.

"It's something we want to do more," she said.

"The limiting factors are the eligible assets."

BLOOMBERG