Thursday 18th July 2019
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Australia's ANZ Bank has taken another hit, with the international credit rating agency Fitch downgrading the bank's operations in both Australia and New Zealand from a 'stable' to a 'negative' outlook, citing "material shortcomings in operational risk management, which were not aligned with the assessment Fitch had previously incorporated into its ratings".
Also receiving a Fitch outlook downgrade to negative, for the same reasons, was fellow Australian 'big four' trading bank, Westpac, along with its New Zealand operation.
"This resulted in a downward revision to our score for management and strategy and a negative outlook on earnings and profitability", along with a heightened assessment of the risks to the bank "if its management team fails to prevent the risks from the remediation of operational and compliance risk shortcomings from spilling over into its ongoing businesses", Fitch said of both banks.
"This is most likely to manifest in weakening earnings relative to peers," said Fitch in a statement six days after the Australian Prudential Regulation Authority required ANZ and Westpac each to carry A$500 million of additional operational-risk capital on its balance sheet "in response to the bank's self-assessment on governance, accountability and culture".
All of Australia's 'big four' banks have experienced substantial reputational damage following the findings of a royal commission in Australia into banking misconduct. Fitch moved to downgrade the National Australia Bank, owner also of the Bank of New Zealand, to a negative ratings outlook in February.
The APRA capital-holding decision was the "main driver" for both outlook downgrades, but "ratings are also likely to come under pressure if shortcomings are identified in other risk controls, such as credit and market risk," Fitch said.
The outlook revision "reflects the risk that ANZ's focus on remediating operational and compliance risk issues and culture may result in the diversion of resources from ongoing operations, which could ultimately lead to a weakening of ANZ's earnings relative to peers".
However, Fitch was not changing Westpac's or ANZ's AA-minus credit rating for operations in Australia and in New Zealand.
The rating affirmations reflected Fitch's expectation that both banks would maintain their strong company profile in the short term, which in turn would support their "sound financial profile" and the additional capital requirement "should remain manageable and not impair" their ability to meet APRA's 'unquestionably strong' targets, which commence in 2020".
Both outlooks "may be revised to Stable if the governance of operational and compliance risks can be strengthened in line with regulatory expectations without a substantial negative impact on the ongoing businesses and earnings," Fitch said.
ANZ's New Zealand subsidiary has had a string of bad news in recent weeks, beginning in May, when the Reserve Bank of New Zealand censured the bank for using an unapproved operational risk capital model since 2014, followed by the departure of its local chief executive David Hisco over expense irregularities and the launch this week of a class action by victims of convicted Ponzi scheme operator David Ross, whose Ross Asset Management was banked by ANZ.
ANZ's objection to releasing documents supplied to the Financial Markets Authority to the RAM claimants was the subject of a three year legal battle that was subject to court suppression orders until earlier this month.
Meanwhile, ANZ has been leading the charge against proposals by the Reserve Bank of New Zealand to double the current minimum capital-holding requirements of the New Zealand banks in the belief that a readjustment is required to ensure the country's financial system resilience.
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