Following S&P’s announcement on Thursday that Australia’s outlook had been downgraded to “Negative”, the agency stated on a conference call it would be unlikely that Australia’s “local currency rating” would stay at AAA if the “foreign currency rating” is cut. As a consequence of the outlook downgrade some federal government agencies and the state governments of New South Wales, Victoria and the Australian Capital Territory (all AAA-rated) also had their outlooks downgraded to negative from stable (this is because they cannot have a higher rating that the Sovereign). S&P also lowered the outlook for the major banks given their government support. Strangely enough Macquarie Bank’s was unaffected by the sovereign action. However, potentially offsetting the negative outlook on the senior credit ratings of the major banks is the possibility of S&P upgrading the Stand Alone Credit Profile (SACP) of the major banks on the grounds of higher capital. S&P has suggested each of the four majors would need to raise around $7-8 billion in additional common equity to meet S&P’s minimum capital requirements for an upgrade. This ~$32 billion is materially more than the $21 billion raised in local markets through 2016. While S&P do not expect the banks to embark on any capital raising to this extent for at least two years, it is expected over the longer term (i.e. late 2018 onwards). In our opinion this will be a combination of raising common equity via the capital markets, organically generating capital by reducing the dividend payout ratio and/or via non-core asset sales. Finally, it is worth reminding investors that the credit rating of Basel III compliant Additional Tier 1 hybrids and subordinated debt (tier 2) is dependent upon the SACP (not the senior credit rating), so any increase in capital via the increase in common equity (CET1) is a positive for these securities as the level of capital support will increase.