Analysts not troubled by the prospect of a credit downgrade

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Falling to a one-notch credit rating is not so daunting for big banks, as it could only cost them as little as $200 million a year in extra funding costs.

In fact, the bigger worry is how far the Reserve Bank of Australia will go with regard to cutting interest rates. If the sovereign rating is downgraded to AA-plus from AAA, the Big Four would fall one notch to A-plus from AA-minus.

According to ratings agency S&P, the banks are already well capitalised, and increased regulatory capital levels would pressure return on equity. Equity analysts are convinced that banks need $20 billion to $30 billion to meet the upcoming Base IV regime expected to be finalised at the end of this year.

"A-plus is still a very strong rating. The rating downgrade is not a reflection of their standalone credit fundamentals but would be a function of the Commonwealth's modestly lower capacity to support the banks," said Phil Miall, head of credit research and strategy at QIC.

"In the single-A category, they'll still be strong versus many peers. The negative outlook wasn't a big surprise and the market has taken it in its stride. There hasn't been much reaction in the domestic credit and equity markets or in the Australian dollar," he added. QIC estimates the widening of spreads at between 15 and 20 basis points if the downgrade is passed through.

Similarly, CLSA banking analyst Brian Johnson believes that the impact on bank funding costs is so small that it will be overshadowed by the crumbling of margins as falling interest rates hold back the ability of banks to raise mortgage rates.

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