Fitch downgrades outlook for CBA

Fitch Ratings has downgraded its outlook on the Commonwealth Bank to negative from stable, citing governance risks and the financial services royal commission.

However, the agency affirmed CBA’s long-term issuer default rating at AA-.

Fitch says the outlook has been revised to negative to reflect the risks in CBA’s shortcomings in remediating operational controls and governance.

However the unchanged rating is a sign that Fitch expects the bank to maintain its strong franchise and sound financial profile despite the findings of the prudential regulator’s probe.

“Management’s focus may divert from ongoing operations and a likely cost increase might  in a weaker financial profile and franchise,” says Fitch.

“There is also a risk that ongoing inquiries into the sector, including the Royal Commission, identify additional shortcomings.”

Ratings unchanged

The credit ratings assigned to CBA by other ratings agencies remain unchanged.

Standard & Poor’s long-term issuer credit rating is currently AA- with a negative outlook and Moody’s Investor Services long-term debt rating is Aa3 with a stable outlook.

In a release on Monday S&P said the first two rounds of hearings at Australia's ongoing Royal Commission has highlighted a number of potential weaknesses in relation to the Australian banks' governance and risk management. 

Nevertheless, the information and insights that have emerged thus far have not caused the ratings agency to lower its ratings across the Australian banks.

More rigourous lending standards

S&P stressed the continued tightening of lending standards and documentation by Australian banks saying it should strengthen credit risk.

“In particular, we expect that the trend of tightening of lending standards for residential mortgages is likely to continue in the foreseeable future.

“This trend has been underway for the past two years, partly driven by the regulatory push.

S&P claimed this augurs well for an orderly unwinding of economic imbalances built up in the last several years on the back of rapid growth in house prices and private debt.

Although tighter lending standards should help in keeping the credit risks facing Australian banks in check, S&P conceded that they could also impede earnings growth.

Moreover, the ratings agency reckons that more stringent lending standards could also be a helpful stimulus to growth of business for nonbank lenders, not subject to the strict regulatory oversight imposed on banks.

“We also see the possibility of banks facing legal action from customers or other stakeholders based on the information coming out of the royal commission, which may lead to disruption in business or significant financial costs.”

Not always in lockstep

S&P said the starting point of its rating on a bank in a country is linked to its Banking Industry Country Risk Assessment (BICRA) scores. 

Ultimately, all of these factors feed into the BICRA model which sets the baseline for all of S&P's bank ratings in Australia.

Changes in BICRA may cause across-the-board rating actions on all bank ratings in a  country, the firm noted.

“Nevertheless, such rating actions are not always in "lock-step" with BICRA changes.

"In our current BICRA assessment on Australia, there is  sufficient buffer for a modest rise in industry risks without it resulting in  bank downgrades."

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