FT Alphaville " Canadian banks 1, Australian banks 0 Fitch has put Australian banks on ratings watch negative, while affirming Canadian banks" ratings. As Fitch points out in an accompanying report, both countries" major banks are among the few such institutions rated AA and have many similarities. However: one gets "RWN"-ed, one doesn't. The key reason, any observer of Australian banks won't be surprised to hear, is the country's reliance on wholesale funding, particularly from overseas (for which the currency denomination is a sort of proxy, in lieu of accurate data). Here are some nice comparisons the Fitch analysts put together: Some more differences: Australian banks have a higher interest margin and return on assets than Canadian banks. And Australia has a much higher net external debt. The chart below is for the countries as a whole, but Fitch says a significant portion of these liabilities relate to the banking sector: But the similarities abound. Both have very highly concentrated banking sectors: the top four banks in Australia account for 75 per cent of banking system assets, while the top six in Canada account for about 90 per cent. Fitch says this concentration and the high profits of the sectors in both countries are a kind of safeguard - providing buffers against losses and reducing the need to chase higher-risk lending. So, on to housing. Both have somewhat overvalued housing markets (IMF estimates are 10 per cent for Canada and 10 - 15 per cent for Australia). Or, according to the Economist: And both have a big chunk of mortgage debt on their books: Fitch notes that some of the Canadian "personal loans" are secured against housing, making the two countries" banking sectors more similar in this regard than this diagram suggests. They add: Underwriting standards for the major banks are generally considered to be good in both Australia and Canada, with neither country having substantial subprime, low-documentation (low-doc) or similar mortgage categories. Non-conforming loans, the closest equivalent to subprime loans in Australia, accounted for only around 1% of the mortgage market in mid-2007 compared with around 13% subprime in the US at the same time. In Canada, subprime mortgages accounted for less than 3% of the total going into the financial crisis. They were also impressed by the regulatory requirements: For example, Canada established higher capital requirements than specified by Basel and than implemented in many other countries (see Figure 19). In addition, OSFI applied more stringent requirements for the quality of capital in advance of the GFC with 75% of Tier 1 capital having to be accounted for by common equity compared with 50% under Basel II. As with Australia, even if the more stringent requirements did not act as a binding constraint on the banks" capital position, they are nevertheless indicative of a more active and conservative approach to regulation. However, you can see that here, also, Australia's showing is less impressive than Canada's: Fitch says, both are justifiably highly rated relative to many of their peers. Presumably the ratings agency didn't get jittery about rehypothecation, when it comes to the Canadian banks. Or Satjayit Das" view of Australian banks. Related links: Australian Bank Capital and the Regulatory Framework - RBA The steady climb in household debt - Globe & Mail This entry was posted by Kate Mackenzie on Monday, January 30th, 2012 at 13:27 and is filed under Capital markets. Tagged with Australian banks, canadian banks.