S&P says housing biggest risk for banks

The main risk facing banks is the housing downturn and not the banking royal commission, which will make lenders cautious but have no lasting impact on reputations or funding costs, credit experts say. "We see a scenario where the rapid unwind [of housing] is the most plausible scenario for what can go wrong for banks in Australia," S&P's director of financial institutions ratings, Sharad Jain, said.

"We think house prices will continue to slide down, which is partly about momentum, and partly a realisation as it gets played out in media repeatedly that house prices are overvalued and in a correction phase. "But at the same time, we think that the risk of a harsh correction ... remains relatively low even though it is elevated by historical standards."

S&P Global expected banks to lend more cautiously as a result of the Hayne royal commission due to fears they'll be fingered for doing the wrong thing. Fitch Ratings downgraded its outlook on NAB's long-term default rating from "stable" to "negative" on Friday, amid concerns management attention will be diverted to repairing its battered reputation.

S&P said its ratings remain unchanged and it expected the royal commission to have no impact on major bank access to wholesale funding or the cost of funding, although they will be more conservative approving home loan applications.

"We consider in the next two years particularly, the banks will act in a very cautious and conservative way because the banks certainly are not keen to be in the news [for] doing the wrong thing, by customers, for responsible lending or adding to sys- tem-wide risk," Mr Jain said. "So even if there is no change in regulation, we believe the banks will ... be cautious, and as a response there will be some depression on credit growth, which is already depressed compared to what we have seen in the past couple of years."

Yet Fitch affirmed NAB's rating, reflecting its expectation the bank will maintain a strong credit profile over the short term. S&P also said on Friday it retained confidence in NAB, despite the departure of chairman Ken Henry and chief executive Andrew Thorburn last week, noting NAB still had "depth and breadth to fill the gap".

More broadly, the royal commission had cast doubts on Australian bank governance and reputation, but over the long term "we don't see it posing any lasting damage to the franchise[s] or funding costs," Mr Jain said.