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Australian banks' offshore forays cloud upbeat S&P assessment

Friday 2nd December 2011

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Australia’s biggest banks have a ‘strong’ business position and ‘adequate’ funding, though their forays into other markets and reliance on offshore wholesale funding are risks that need ongoing monitoring, Standard & Poor’s says. 

The credit ratings of Australia & New Zealand Banking Group, Commonwealth Bank of Australia, National Bank of Australia and Westpac Banking Corp to AA-minus from AA yesterday, reflecting changes last month to rating criteria applied to financial institutions across the Asia Pacific region.

S&P released almost identical assessments of Australia’s big four lenders, which own New Zealand’s largest banks.

All have a stable outlook and benefit from implied government support on the basis they would be too important to Australia’s economy to be allowed to fail. They all have conservative lending practices in a market with a sturdy regulatory framework.

Where the banks got marked down was on their exposure to other markets. For example, they all operate in New Zealand, which has a Banking Industry Country Risk Assessment (BICRA) score of 3, which is worse than Australia’s at 2, on a scale where a lower number denotes a lower risk.

NAB does 10 percent of its lending in New Zealand and the same amount in the UK, where the lender has been forced to recognise loan impairments and where the BICRA rating is 4, giving it a weaker-than-average economic risk score.

“NAB’s UK banking subsidiary is underperforming relative to NAB’s other major businesses,” S&P said. That provides “a negative counterpoint” for its business position relative to its three major rivals.

NAB’s capitalisation is adequate though it compares least favourably with its three main rivals.

S&P is “continuing to closely monitor NAB’s UK strategy” including whether it sells or retains its Clydesdale business, which has been hurt by the UK’s “difficult” economic environment.

All four lenders are “materially reliant” on wholesale funding from offshore, which S&P regards as a negative rating factor. Still, they had been less exposed to the global financial crisis than many of their global peers.

Commonwealth Bank is in the strongest position in terms of where it sources funds, getting 61 percent of funding from customers in the year ended June 30, up from 58 percent a year earlier as it positions itself for the higher liquidity requirements of Basel III.

Some 42 percent of total deposits are from households, the highest among the four lenders.

CBA is Australia’s largest retail lender, with A$668 billion of assets at June 30. While the bank has expanded into Asia, its ventures have been relatively small scale, S&P said.

Conversely, the ratings company said it is “cautious” about ANZ Bank’s expansion into Asia and its ambition to be getting 25 percent of revenue from Asia, Europe and the US by 2017.

Its dominance in the New Zealand market, where it is the biggest lender and makes about 20 percent of its total lending, also weakens its weighted average economic risk score.

Westpac’s strengths included a domestic focus in Australia and New Zealand with “well-understood products and customers,” S&P said. Its challenges included the 2009 acquisition of St.George Bank, which has a relatively high reliance on wholesale funding.

In a separate report, Moody’s Investors Service said Australia’s banking system was “stable” though facing some challenges. 

“While we continue to view the Australian banking system’s relatively high proportion of offshore wholesale funding to be a structural sensitivity, customer deposits have been growing faster than loans as deleveraging continues,” said Moody’s senior vice president Patrick Winsbury. That’s allowed lenders to reduce their reliance on offshore wholesale funding,Australia’s lenders also benefit from the nation’s “fundamentally solid” economy, with private consumption set to grow, Moody’s said.

The banks have built “sizeable capital buffers” to absorb any weakness in asset quality, which would help them cope with offshore shocks such as Europe’s sovereign debt crisis, it said.


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