Focus on Australia after Canadian bank downgrade

Australia’s banking sector has regularly been compared to Canada’s banks, but this comparison is likely to sit uncomfortably following the surprise credit rating downgrade over the bulk of the Canadian sector early on Tuesday.

Ratings agency Moody’s downgraded several big Canadian banks, cutting the ratings on five banks and one credit union by one notch. The downgrade was triggered by Moody’s concerns over Canadian banks’ exposure to heavily indebted consumers and elevated home prices.

Among the Canadian banks affected were Toronto-Dominion and Bank of Nova Scotia which are now each rated Aa2. Bank of Montreal, CIBC and National Bank of Canada were cut to Aa3. The ratings were all given stable outlooks.

This compares with Australia’s big four banks, which each carry an Aa2 rating, among some of the highest rated banks in the world.

“The Canadian banks’ downgrades will inevitably turn some attention towards Moody’s ratings of the Australian banks,” said National Australia Bank credit strategist Michael Bush.

However, Mr Bush pointed to a report issued by Moody’s last month noting that Australia’s major banks were “well positioned to withstand significant loan losses from any unanticipated economic downturn”.

Indeed, the December assessment by Moody’s said the outlook for the Australian banking system was stable. The ratings agency said there may be “moderate and patchy” pressure on the lending books of the Australian banks, but bad debt charges would probably remain below the sector’s long-term average.

Moody’s added that it expected bank earnings growth to slow as a result of low credit growth. However, it stressed that overall profit metrics would remain consistent with current rating levels.

Mr Bush noted the bulk of Moody’s concerns lay more with the Australian banks’ reliance on offshore funding, an area that has improved further.

Even so, Mr Bush said it was still possible that a one-notch downgrade from Moody’s could still occur and need not be predicated by a “material event”, such as a collapse in housing prices or a sharp surge in lending losses. Any ratings cut threatens to push up borrowing costs for the banks.

Earlier on Tuesday, Moody’s said Canada’s banking sector still ranked ahead of most of the world, despite the cut.

David Beattie, vice-president and senior credit officer at Moody’s, said Canada’s banks ranked second behind Singapore’s in terms of credit outlook, and were roughly in line with major Australian banks.

But he said Canada’s banks were “more vulnerable to unpredictable downside risks facing the Canadian economy than in the past”, given the state of the country’s housing market.

The original release of this article first appeared on the website of Hangzhou Night Net.

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