In a report comparing the major Australian and Canadian banks, Fitch Ratings has put several of the big Aussie banks on rating watch negative while affirming its ratings on the Canadian banks, citing their superior funding position.
The report, which reviews the main features of Australian and Canadian major banks, confirms the rating agency’s opinion that the four Australian and six Canadian major banks are justifiably highly rated. However, it notes that the funding profiles in these two countries represent a notable difference, with the Canadian banks having a stronger profile than the Australian banks.
“Although Canadian banks are clearly not immune to global developments and face increased challenges in the current environment, especially relating to household leverage and future earnings growth, at this juncture, the agency does not view these issues as calling into question existing ratings,” it says, adding that, given their already high ratings, upward momentum is unlikely.
“Moreover, depending on the evolution of the challenges facing Canadian banks, this may result in the potential deviation of an individual banks’ rating performance,” it adds.
However, the agency views the Australian major banks’ ratings as under some pressure at their current levels. It says the rating watch negative designation for the four major Australian banks largely reflects Fitch’s view that despite significant improvements, these banks continue to have a weaker funding profile than other similarly rated peers.
In addition, the report notes that Australian and Canadian banks are each subject to many of the same themes and trends as other banks globally including an uncertain macroeconomic environment and evolving regulatory regimes.
Considering the major Australian and Canadian banks as a peer group in the report reflects numerous similarities in the size and nature of these two economies as well as their banking systems, Fitch says. It notes that both banking systems are highly concentrated, subject to strong regulatory regimes and have various structural features which help to reduce risk. Both economies have outperformed many peers during the financial crisis, which is both a cause and effect of a strong banking system. Less positively, both countries have high levels of household leverage, have seen sharp increases in real estate valuations since the 1990’s and inevitably, are not immune to adverse global developments such as the Eurozone debt crisis.
Although other banking systems could also be compared, it notes, adding that the similarities of the banks’ rating levels and broad environment leads to useful insights, especially given some market speculation that these banks’ outperformance may be attributable to a favourable commodity cycle.