REGIONAL BANKS HIT OUT AT RATING CUT AND WARN BIG FOUR WILL BENEFIT

REGIONAL banks have hit out at a downgrade on their credit ratings, warning that it will increase their wholesale funding costs and make it harder for them to compete against the so-called Big Four.

Standard & Poor's lowered the credit rating of 23 Australian institutions this week, excluding the big four banks, and this prompted the Bank of Queensland (ASX: BOQ), Bendigo and Adelaide Bank (ASX: BEN) to call for changes to "even the playing field".

Bank of Queensland lost its 'A-' rating and was cut to 'BBB+' and Bendigo and Adelaide Bank was also downgraded to 'BBB+'.

S&P cited the main reason for cutting the regional banks' ratings was the risk of a "sharp correction" in house prices in the heated markets of Sydney and Melbourne. The ratings agency excluded the Big Four as it assumes they would be bailed out by the government in a financial crisis.

BOQ chief executive Jon Sutton says Commonwealth, ANZ, NAB and Westpac all have very large exposure to the Sydney and Melbourne market while his company had half its loan book concentrated in Queensland which is a more stable market.

"S&P's decision is based on its view that continued build-up of economic imbalances in the country over the past few years due to a rapid rise in private sector debt and house prices, particularly in Sydney and Melbourne, has exposed Australian financial institutions to greater risks," BOQ says in a statement to the ASX.

"We note that BOQ has a significantly lower level of exposure to the Sydney and Melbourne property markets than many other industry participants."

Analysts have said that any gains the smaller banks may have received from the bank levy could be wiped out by the credit downgrades as the subsequent rise in wholesale funding costs would eat into their profits.

Bendigo CEO Mike Hirst also expressed frustration at the credit downgrade and pointed to S&P's justification for the downgrade which acknowledged the Big Four were driving the risks in Sydney and Melbourne.

"They're (the Big Four) driving it, they hold 80 per cent of that risk, yet they were the only ones that didn't get downgraded. This is the frustration of the uneven playing field," Hirst says.

On Tuesday, BOQ shares fell 2.5 per cent to $11.37 and BEN shares lost 1.6 per cent to $11.64.

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