Fitch dumps big banks onto negative watch

In a move that will probably take the markets a little by surprise, Fitch has just announced it’s placing the big four on negative ratings watch owing to funding pressures and commodity exposure:

Fitch Ratings-Sydney/New York/Singapore-30 January 2012: Fitch Ratings says that in conjunction with its broad review of the largest banking institutions in the world and following the newly-published special report on major banks in Australia and Canada, Fitch has placed four major Australian banks’ Long-Term Issuer Default Ratings (IDR) and Viability Ratings (VR) together with many of their subsidiaries’ ratings, on Rating Watch Negative (RWN). The four banks are Commonwealth Bank of Australia, National Australia Bank Limited, Westpac Banking Corporation, Australia and New Zealand Banking Group. At the same time, the agency has affirmed six major Canadian banks (Royal Bank of Canada, Toronto-Dominion Bank, Canadian Imperial Bank of Commerce, Bank of Nova Scotia, Bank of Montreal, and National Bank of Canada) all with Stable Rating Outlooks.

The assessment and comparison of major Australian and Canadian banks reflects their status as some of the highest rated banks in Fitch’s universe as well as a number of broad similarities in their economies and banking systems. These similarities include comparably sized economies, some benefits derived from favourable commodity prices, outperformance of their major banks since the start of the global financial crisis in 2007 as well as significant growth in credit and house prices since the 1990s.

Fitch’s review of the major banks, summarised in the newly-published report, confirms its opinion that the four Australian and six Canadian major banks are justifiably highly rated. Nevertheless, the agency views the Australian major banks’ ratings as under some pressure at their current levels. Specifically, the RWN 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 agency 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.

Fitch expects to resolve the RWN within a short time frame and will incorporate an updated view of Australian banks’ strengths, weaknesses and trends. The agency expects that any downgrades of the four major Australian banks’ ratings are most likely to be limited to one notch with those entities currently rated at ‘AA’ most at risk The resolution of the RWN will be based on Fitch’s review of the most recent available data, including any new or additional information provided by the issuers that is relevant to their ratings.

The affirmation of the major Canadian banks reflects confirmation of their consistent earnings trends, favourable funding positions and sound capitalisation as well as Canada’s comparatively favourable economic environment and a currently stable domestic banking market. 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. Nonetheless, 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 going forward.

And then a second press release:

Fitch Ratings-Sydney/New York/Singapore-30 January 2012: Fitch Ratings has published a report which reviews the main features of Australian and Canadian major banks. The report, “Australian and Canadian Major Banks: Structural Features Favourable but Funding Remains Key Issue for Australian Banks” confirms the agency’s opinion that the four Australian and six Canadian major banks are justifiably highly rated. However, funding profiles in these two countries represent a notable differentiator with Canadian Banks having a stronger funding profile compared to Australian and most other banks rated in the ‘AA’ range.

Consideration of 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. The assessment also reflects these banks’ positions as amongst the most highly rated in Fitch’s rated universe and strong performance through the global financial crisis. Although other banking systems could also be compared, 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.

The Australian and Canadian banking systems are both 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.

The four major Australian banks (Commonwealth Bank of Australia, Westpac Banking Corporation, National Australia Bank Limited, Australia and New Zealand Banking Group) are viewed as having strong asset quality and sound capitalisation, especially given a conservative approach to the calculation of regulatory capital ratios. Profitability levels have been consistently high compared to peers in other countries with low levels of market risk and securities holdings. However, although on an improving trend, the funding profile of Australian banks compares unfavourably to Canadian and some other peers.

Following this high level review and in conjunction with its broad assessment of ratings on the largest banking institutions in the world, the four major Australian banks have been placed on Rating Watch Negative. Further details are noted in today’s separate release “Fitch Places Major Australian Banks on RWN, Affirms Canadian Banks”.

The funding profile of the six major Canadian banks (Royal Bank of Canada, Toronto-Dominion Bank, Canadian Imperial Bank of Commerce, Bank of Nova Scotia, Bank of Montreal, National Bank of Canada) is viewed as a particular strength compared to peers. 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. Nonetheless, 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 going forward.

Of course, S&P recently downgraded the banks and no doubt tomorrow’s parochial commentary will again place this move in the “idiot catch up” category. But it is a bit of a surprise and contributes to the steady drip of news eroding Australian bank exceptionalism. It will be interesting to see if this reverses at all the current decoupling in local funding markets.

David Llewellyn-Smith
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Comments

  1. Little odd that you can currently borrow funds for housing in canada at less than half the rate charged by banks here?

    • And from what I hear its bubble isn’t anywhere near as widespread as ours.

      I feel a wholesale funding guarantee coming on. The banks better toe the line next week. Otherwise we might expect covered bonds at +200, unsecured debt upwards of 250 above the swap.

    • Only the major cities of Vancouver, Calgary, Edmonton, Toronto, Ottawa and Montreal (an island) have bubbly prices and in those, really only Vancouver, Calgary and Toronto have Aussie bubble prices.

      Canadian regional cities and towns are pretty ‘normal’ where as in Australia the debt bubble is across the board including Australia’s defunct and shrinking country towns.

        • Canadians don’t have negative gearing. It was a completely foreign concept when I arrived here four years ago and as such it is my feeling that despite Canadians still being warned by the BoC of too much leverage, it is nowhere near as perilous as the housing bubble here in Oz. Hell will freeze over before we purchase property here in QLD.

      • Wasn’t the median multiple in the Demographia report published here a few days ago around 9 in Coffs Harbour, and 6 in Alice Springs?
        They’re great places for sure, but…

  2. The MSM in Canada seems to be fundamentally different than that of Oz. I still cannot believe the lack of legitimate discussion on debt levels and property prices here in Australia.

    My home country obviously has its share of economic problems (over 80% of our trade is with the US), but the Governor of the BoC and one of the leading papers have been focused on the consumer debt level issue for a while now.

    Even within the last few weeks, the following articles were on the front page of the national broadsheet that I would probably claim is somewhat equivalent to The Australian. Regardless of whether you are a bull or bear, I know I appreciate the fact that you can get much more insightful opinions and debate here at Macrobusiness.com

    From The Globe and Mail in the last two weeks (and these are only a fraction of the detailed analysis found in the paper):

    http://www.theglobeandmail.com/report-on-business/economy/economy-lab/daily-mix/older-consumers-pile-on-new-debt/article2315580/

    http://www.theglobeandmail.com/report-on-business/commentary/barrie-mckenna/stalled-on-the-road-to-economic-recovery/article2310824/

    http://www.theglobeandmail.com/report-on-business/top-business-stories/were-living-on-borrowed-money-and-borrowed-time/article2304034/

    http://www.theglobeandmail.com/report-on-business/economy/interest-rates/carney-holds-rates-steady-even-as-his-concerns-increase/article2305007/

    • Thanks for those links…interesting reading, including the many comments from Canadian readers..

      • You’re welcome. Whereas here it seems that pressure is put on twentysomethings to get into the market as fast as possible, I was slapped over the wrist for even considering taking on too much debt in the form of a mortgage. I think that is why the philosophy of negative gearing is so disturbing to me.

        Canadians are now carrying debt loads close to the American levels where the bubble popped, but everyone from Carney (Boc Governor) to the major banks are highlighting the issue. There is a resounding echo across the country from all fronts to ensure that consumers get their houses (no pun intended) in order. Whether they listen, is another story….

    • > I still cannot believe the lack of
      > legitimate discussion on debt levels
      > and property prices here in Australia.

      Haven’t you heard that Australia is different?

      • Oh yes, the mantra of many of my Aussie friends. I would rather discuss politics or religion than discuss real estate. Nothing seems to get people’s backs up, like discussing real estate prices!!!

        I still love this clip UE posted sometime last year, “Australia is Different”

        http://www.youtube.com/watch?v=CroTAVVcr9k

  3. MsSolarFelineAU

    I can feel bank stock-shorting, coming on. (Said to “I can feel a XXXX coming on” jingle-tune) 😉