Rising house prices and persistent current account deficits have put the credit worthiness of eight of New Zealand's smaller lenders under threat.
Standard Poor's warns there is a one-third chance that TSB Bank, Heartland Bank, Co-operative bank and a number of credit unions could be downgraded by as much as two notches in the next two years.
The ratings agency warns these organisations - which account for less than 5% of total lending of $180 billion - are vulnerable if the economy suffers a sharp downturn.
In contrast, the country's main banks: Australian-owned ASB, BNZ, ANZ and Westpac, and Kiwibank are unaffected. Their ratings, which are mostly AA, are unchanged.
KPMG head of financial services John Kensington said the difference is due to the big banks having the support of deep-pocketed owners.
Finance Minister Bill English said on Friday the ratings agency is highlighting the vulnerability of the small lenders if the economy suffers a sharp downturn
"Standard Poor's endorse the Government's Budget, but the ratings downgrade for the small banks simply underlines the risks that we've talked about in the housing market.
"Standard Poor's have made it quite specific that their downgrade is related to what they regard as a fast rising housing market."
Mr English said the Reserve Bank is taking steps to reduce the emerging risk from rising house prices.
Standard and Poor's notes that measures planned by the central bank to bolster the stability of the banking system could reduce some vulnerabilities.
Heartland Bank, which has a BBB rating, said the change reflects the wider risks to the economy, not its position, and it is reducing its exposure to the housing market.