Major Australian banks’ AA/Stable ratings have remained unchanged and the banks will continue to strengthen capital ratios over the next 18 months to comply with more stringent regulatory standards, according to Standard & Poor’s (S&P) research.
“While Australian banks’ risk-adjusted capital (RAC) scores are close to or slightly higher than the global average for major banks, and capital is a slight weakness to the rating profile, we consider the ‘AA’ ratings as stable and supported by other very strong business and financial considerations, as well as the evidenced flexibility to raise capital if needed,” said S&P ratings services credit analyst Michael Vine.
Failure to strengthen capital ratios could put pressure on ratings, its research paper S&P Ratio Highlights Disparate Capital Strength Among The World’s Biggest Banks stated. However, capital was only one element of analysis, which also took into account the economic and regulatory framework, competitive position, earnings, asset quality, funding and liquidity, and external support mechanisms such as government support.
The research found that Australian banks in the sample achieved an average RAC score after diversification of the sample 45 largest global banks, and were above average before diversification benefit. It stated that the major Australian banks benefited from a comparatively low economic risk environment and a higher proportion of lower risk residential mortgage assets. However, S&P said they did not benefit from business and geographic diversity to the extent that their overseas counterparts did.
Strong business profiles in Australian and New Zealand markets, resilience to the global economic downturn and the Australian banking sector’s less competitive environment (and therefore less risky lending standards) compared to other countries have further supported the ratings, S&P stated.
