Ratings agency Fitch has signalled concern with ASB Bank’s ability to repay its creditors, following a damning report into the culture and governance of its parent Commonwealth Bank of Australia (CBA).
The outlook on ASB’s AA- long-term foreign and local currency debt ratings has been cut to ‘negative’ (from ‘stable’) after the Australian Prudential Regulation Authority (Apra) report criticised CBA for a myriad of issues ranging from executive pay to failing to respond to customer complaints. The report, released last month, had 35 recommendations for CRA’s board and management.
Fitch senior director Tim Roche says there is a risk that CBA’s leaders may take their eye off the ball in terms of day-to-day financial performance of the bank, as they concentrate on sorting out shortcomings in operational controls and governance brought up in the Apra investigation.
“A likely cost increase might manifest in a weaker financial profile… There is also a risk that ongoing inquiries into the sector, including the Royal Commission, identify additional shortcomings,” Roche says.
This could leave CBA “more susceptible than its peers to a weaker operating environment”.
Fitch revised the outlook on CBA and ASB’s “long-term issuer default rating” (a measure of the likelihood an institution can repay its creditors) from stable to negative. That means that the rating agency is considering downgrading the banks’ credit ratings in the future.
There is also a risk that ongoing inquiries into the sector, including the Royal Commission, identify additional shortcomings.
Roche argues that because ASB Bank would rely on its parent to bail it out if it got into difficulties, if CBA is deemed less able to pay its debts, then ASB’s creditworthiness is also impacted. But the same could happen the other way around too.
“If ASB’s parent remediates its operations according to the plan in the report, that should strengthen the rating, and we would expect to look to revise it back to stable.”
ASB didn’t want to comment on the downgrade but pointed out in a statement to the stock exchange that its rating with the two other main agencies remains 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 A1 with a stable outlook.”
Massey University banking expert, Professor David Tripe says that in theory, a negative outlook rating might make it more expensive for ASB Bank to borrow money on the wholesale market. Basically, the higher the risk of default, the higher the interest rate a lender might charge.
However, given that both CBA and ASB have high ratings to start with (AA-), lenders might not be too concerned, Tripe says.
“It’s not going to be a big deal. If they were further down the rating scale there might be a bigger impact, but the difference between a rating change and the impact on the cost of funds isn’t linear.”
The next possible blot on the bank rating horizon will be the Australian Royal Commission report into Misconduct in the Banking, Superannuation and Financial Services Industry, Roche says. The interim report is due in September, with the final document expected early next year.
However, unless CBA’s performance comes out as being significantly worse than that of other Australian banks, it might not affect ratings, which reflect comparative performance, Roche says.
“The base case is you still have a reasonable operating environment for banks in Australia.”