Fitch: No Bank Ratings Impact From Australian Inquiry Report

Tue Jul 15, 2014 11:08pm EDT

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(The following statement was released by the rating agency) SYDNEY, July 15 (Fitch) Fitch states that policy options contained in the interim report of Australia's Financial System Inquiry (FSI), published 15 July 2014, are unlikely to have any immediate impact on Australian bank ratings. However, certain measures may have a modest negative impact on the credit profile of some banks in the medium-term if implemented and competitive positions are undermined, or they contribute to an increased risk appetite. One of the key rating drivers of the Viability Ratings and Issuer Default Ratings (IDRs) of Australia's four major banks - Australia and New Zealand Banking Group Limited (AA-/ Stable), Commonwealth Bank of Australia (AA-/ Stable), National Australia Bank Limited (AA-/ Stable) and Westpac Banking Corporation (AA-/ Stable) - is the strength of their domestic franchises. The report proposed a number of measures that would increase the competitiveness of smaller financial institutions at the expense of the four major banks. These revolved largely around the disparity between the risk-weights for residential mortgages in banks accredited to use the advanced Basel approaches relative to those that use the standardised approaches, although measures to boost the RMBS market were also considered. Measures such as 'bail-in' of creditors, strengthened resolution powers, higher capital requirements, and ring-fencing of retail operations were proposed to address the issue of 'too big to fail'. As is the case in other financial systems, these policies would likely result in downgrades of the Support Ratings and Support Rating Floors of Australian banks if implemented, although IDRs would be unaffected as no Australian bank is currently at their Support Rating Floor. Fitch's Support Ratings and Support Rating Floors currently factor in an extremely high likelihood of support for the four major banks given their high market shares and the system's reliance on offshore wholesale markets for funding. Fitch believes Australian banks benefit from the conservative and hands-on approach of the Australian prudential regulator which has supported the bank's high ratings, and any weakening of the current stance is likely to be viewed as negative. The FSI's interim report was broadly supportive of the conservative stance of Australia's regulators, although it called for further submissions on whether prudential regulation should sit closer to global norms or to calibrate it so that it is, on average, more conservative than the global median. It also proposed policy options that would result in greater international comparability of Australian regulatory capital ratios and called for further investigation on the merit of increasing the suite of macro-prudential tools available to regulators. It is important to note that the interim report does not contain policy recommendations but rather addresses a number of observations made in the submissions and provides a range of possible policy options, including no changes to current policy settings in most cases. The inquiry will undertake further consultation with stakeholders to assess areas of high priority and the costs and benefits of different policies before providing its final report, including policy recommendations, in November 2014. The commonwealth government will then decide which measures to adopt, with implementation unlikely prior to the next federal election, due in 2016. Contact: Tim Roche Senior Director +61 2 8256 0310 Fitch Australia Pty Ltd Level 15, 77 King St, Sydney Andrea Jaehne Director +61 2 8256 0343 Media Relations: Leni Vu, Sydney, Tel: +61 2 8256 0326, Email: Leni.Vu@fitchratings.com. Additional information is available on www.fitchratings.com Related Research: 'Fitch Affirms Australia's Four Major Banks', published 17 June 2014 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S FREE WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Fitch Australia Pty Ltd holds an Australian financial services licence (AFS licence no. 337123) which authorises it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.

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