Standard & Poor's has downgraded the credit ratings of the big four Australian banks and their new New Zealand units by one notch to AA- as part of its global review of bank ratings. Their ratings outlooks are stable.

S&P cut ANZ National Bank Ltd's rating and UDC Finance's rating to AA- from AA, having also cut the rating of their Australian parent ANZ Group to AA- from AA.

It cut Commonwealth Bank of Australia's rating to AA- from AA and that of its subsidiary ASB to AA- from AA.

National Australia Bank's rating, and that of its subsidiary Bank of New Zealand, were cut to AA- from AA.

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Westpac Banking Corp's rating was cut to AA- from AA. Its New Zealand subsidiary Westpac New Zealand was cut to AA- from AA.

Standard & Poor's cut Macquarie Bank's rating by two notches to BBB.

The one notch downgrade of New Zealand's big four banks has been widely expected in the banking industry but could see bank funding costs rise. Sydney-based Royal Bank of Scotland banking analysts Andrew Lyons, Ashley Dalziell and John Buonaccorsisaid earlier this year said a one notch downgrade could add 15-30 basis points to term funding costs.

The ratings downgrades come after S&P's reviewed its bank rating methodology.

The re-ratings also reflected that rating agencies were "extraordinarily nervous" and needed to restore their mana, having been blamed along with regulators and others for failing to head off the global financial crisis, said the chief economist at the Bank of New Zealand, Stephen Toplis.

However, the Australian and New Zealand banking systems were in relatively good shape.

"It's a very very scary world out there and to have a banking system in Australasia positioned where it is, is fantastic," Toplis said. "Just be very thankful we live in this part of the world. The absolute may not be great, but the relative position is staggering."

Peter Sikora, S&P's analytical manager for financial institutions in the Pacific, said in February the methodology revamp was both a continuing evolution of S&P's analysis and the incorporation of lessons learnt from the Global Financial Crisis. Sikora suggested then the big four New Zealand banks could be downgraded.

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"The biggest thing we learnt from the Global Financial Crisis is that the operating environment plays a more significant part of an individual entity's credit profile," said Sikora.

"While we always believed that, that gets a far more significant weighting in the new criteria. It's akin to the example of having the best house in the street, but at the end of the day the quality of your house is also a function of the neighbourhood it's in."

As part of the review S&P last month downgraded its Banking Industry Country Risk Assessment (BICRA) on New Zealand to group 3 from group 2, placing major local banks in the same group as banks from Italy, the United States, Britain and South Korea. S&P says the BICRA methodology evaluates and compares global banking systems using economic risk and industry risk factors.

A BICRA is scored on a scale from 1 to 10, ranging from the lowest-risk banking systems (group 1) to the highest-risk (group 10).

Earlier this week S&P released its ratings under its new methodology on 37 of the world's biggest banks.

This saw Rabobank New Zealand cut two notches to AA from AAA, the Hong Kong based parent of New Zealand's HSBC - the Hongkong and Shanghai Banking Corporation Ltd - cut to AA- from AA, and big US investment banks Goldman Sachs, JP Morgan Chase & Co and Morgan Stanley downgraded.

The S&P downgrades come after its rival Moody's Investors Service downgraded the credit ratings of New Zealand's four biggest banks by one notch to Aa3 from Aa2 in May citing the country's subdued economy and the banks' exposure to wholesale financial markets, where they get around a third of their money, for funding.

- INTEREST.CO.NZ/BusinessDesk