Fitch placed four major Australian banks, and related New Zealand and UK covered bond issuing subsidiaries on Rating Watch Negative today (Monday) following a broad review of the largest banking institutions in the world and a special report on Australia and Canada. Six Canadian banks were affirmed.

The following covered bond issuers have been put on RWN: Commonwealth Bank of Australia, rated AA; Australia & New Zealand Banking Group (ANZ), AA-, as well as its New Zealand subsidiary, ANZ National Bank Limited, AA-; National Australia Bank Limited (NAB), AA, and subsidiary Bank of New Zealand, AA; and AA rated Westpac Banking Corporation and Westpac New Zealand Limited. NAB UK subsidiary Clydesdale Bank’s A+ rating is also on RWN.

Any downgrade of the four major Australian banks’ ratings is most likely to be limited to one notch, with those entities rated AA at most risk, said Fitch.

The rating agency said the assessment of the Canadian and Australian banks reflected their status as some of the highest rated banks in Fitch’s universe. It also said that the assessment reflected similarities in their economies and banking systems, such as comparably sized economies, some benefits derived from favourable commodity prices, an outperformance of their major banks since the start of the global financial crisis in 2007, as well as significant growth in credit and house prices since the 1990s.

In its review Fitch said the four Australian banks and six Canadian major banks are justifiably highly rated, but noted the Australian banks’ ratings are under some pressure at their current levels.

The RWN on the banks takes into account Fitch’s view that despite significant improvements, these banks continue to have a weaker funding profile than similarly rated peers.

Australian and Canadian banks are also subject to many of the same themes and trends affecting other banks globally, said Fitch, including an uncertain macroeconomic environment and evolving regulatory regimes.

The review is expected to be resolved by Fitch within a short time frame and will incorporate an updated view of Australian banks’ strengths, weaknesses, and trends, as well as any new or additional relevant information issuers provide.

Canadian banks affirmed by Fitch comprised AA- BMO, AA- Bank of Nova Scotia, AA- Canadian Imperial Bank of Commerce, A+ National Bank of Canada, AA Royal Bank of Canada, and AA- Toronto Dominion Bank.

The affirmation of the major Canadian banks reflects confirmation of their consistent earnings trends, favourable funding positions, sound capitalisation, and Canada’s comparatively favourable economic environment, and a currently stable domestic banking market.

Although Canadian banks are clearly not immune to global developments and face increased challenges in the current environment, especially relating to household leverage and future earnings growth, said Fitch, “at this juncture, the agency does not view these issues as calling into question existing ratings”.

Given already high ratings, Fitch said upward momentum is unlikely, but depending on the evolution of the challenges facing Canadian banks, this may result in the potential deviation of an individual banks’ rating performance going forward.