Standard and Poor's has cut the outlook for its ratings on eight small New Zealand banks to negative, saying the ratings were vulnerable to a one or two notch downgrade within the next two years if there was a housing market correction.The ratings agency also cited New Zealand's high foreign debts and rising current account deficit in changing the outlook and warned of the risk of a housing market downturn.It said the eight banks were The Cooperative Bank, Heartland Bank, TSB Bank, Credit Union Baywide, Credit Union South, First Credit Union, the New Zealand Association of Credit Unions, and the Police and Families Credit Union."We may lower the ratings on the eight New Zealand banks that are on negative outlook by one to two notches within the next two years if economic vulnerabilities worsen," S&P said.New Zealand's dependence on foreign borrowing and its persistent current account deficit heightens the risks, given an uncertain short to medium term outlook for the global economy, it said."There is an increasing risk that a sharp correction in property prices could occur if there is a weakening in the country's macroeconomic factors."New Zealand's current account deficit was forecast in the 2013 Budget to rise to 6.5 per cent of GDP by 2017, from 4.4 per cent in 2012.A widening of that deficit could heighten the risk of a sharp fall in the New Zealand dollar, which may hit housing market confidence if accompanied by a rise in unemployment, the agency said."If these were to occur, banks' credit losses could rise materially, given that there was a build-up in housing prices and domestic credit over the period preceding the global financial crisis. We consider that such a scenario would have a high impact on the banking sector and financial strength of the balance sheets of New Zealand banks."S&P said its ratings of Commonwealth Bank's ASB, NAB's BNZ, Westpac NZ, ANZ NZ, Bank of India (NZ), Rabobank NZ and Kiwibank were unchanged, reflecting the support of their parents."For the banks that benefit from group support, we are of the view that the ratings of these institutions would remain equalised with that of the parent," S&P said."However, if economic vulnerabilities worsen, the stand-alone credit factor assessments could be negatively impacted."