S&P Global Ratings says it expects to lower its credit ratings on the big four Australian banks and their New Zealand subsidiaries.

The credit rating agency says economic risks facing all financial institutions operating in Australia are rising due to strong growth in private sector debt and residential property prices over the past four years, notwithstanding some signs of growth moderation over recent months.

"Our ratings on the four major Australian banks remain unchanged and on negative outlooks. These ratings were already on negative outlooks reflecting the negative outlook on the Commonwealth of Australia. We expect to now lower our ratings on these major banks and their core subsidiaries [which include the big four NZ banks] under a scenario in which we reclassify our assessment of the Australian government's supportiveness toward systemically important private sector banks to supportive from highly supportive. We now see a one-in-three chance of this scenario eventuating," S&P says.

"Finally, similar to all other financial institutions operating in Australia, we expect to lower our assessment of the SACPs [stand alone credit profiles] of the Australian major banks, in our alternative scenario of continued strong growth in private sector debt or property prices."

ANZ NZ, ASB, BNZ and Westpac NZ currently all have AA- credit ratings with a negative outlook from S&P, equalised with their Australian parents. The outlook on these ratings was dropping to negative from stable in July. At that time S&P said the four banks potentially faced a one notch downgrade to A+. A credit rating downgrade would be likely to raise funding costs for NZ's major banks at a time when lending growth has been exceeding deposit growth, meaning the major NZ banks require more offshore funding.

S&P has also lowered the outlook on Fisher & Paykel Finance's BB credit rating to negative from stable, saying F&P Finance's Australian parent Flexi Group Ltd faces pressures on its group credit profile similar to those faced by other Australian financial institutions.

Two-thirds of banks' lending assets secured by residential home loans

The credit rating agency points out that that Australian private sector debt has risen to about 139% of GDP as of June this year from 118% in 2012. That's an annual average increase of 5.2 percentage points. At the same time property prices nationally have recorded an average inflation-adjusted increase over the last four years of 5.3%. This is driving the potential increase in imbalances in the economy, S&P argues.

"Consequently, we believe the risks of a sharp correction in property prices could increase and if that were to occur, credit losses incurred by all financial institutions operating in Australia are likely to be significantly greater; with about two-thirds of banks' lending assets secured by residential home loans - 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."

S&P says its base-case scenario remains that the growth in Australian property prices and private sector debt will moderate and remain at relatively low levels in the next two years. But; "If risks in the economy continue to grow, other things equal, we expect to lower our assessment of the stand-alone credit profiles of all financial institutions operating in Australia."

Meanwhile, S&P says it believes the Australian government remains highly likely to provide timely financial support to the systemically important private banks in the country, if needed.

"Nevertheless, we now consider that there is a one-in-three chance that within the next two years, we will revise our assessment of government supportiveness to supportive from the current highly supportive."

In July S&P revised its outlook on Australia's AAA credit rating to negative from stable because "without remedial action the government's fiscal stance may no longer be compatible with the country's high level of external indebtedness." See credit ratings explained here.

Here's S&P's statement