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 report 'Australian and Canadian Major Banks: Structural Features Favourable but Remains Key Issue for Australian Banks' is available on www.fitchratings.com and a full list of rating actions is at the end of this commentary.
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.