Fitch changes outlook on the Commonwealth Bank to negative

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Fitch Ratings has revised its outlook on the Commonwealth Bank to negative from stable, citing governance risks and the financial services royal commission.

However, the agency affirmed CBA’s long-term issuer default rating at AA-.

Fitch says the outlook has been revised to negative to reflect the Commonwealth’s risks in remediating operational controls and governance.

“Management’s focus may divert from ongoing operations and a likely cost increase might manifest in a weaker financial profile and franchise,” says Fitch.

“There is also a risk that ongoing inquiries into the sector, including the Royal Commission, identify additional shortcomings.”

However, Fitch expects the bank to maintain its strong franchise and sound financial profile despite the findings of the Australian Prudential Regulation Authority (APRA) inquiry.

The regulator found that a failure of culture was behind a series of scandals which eroded trust in CBA.

The regulator called the bank’s culture “insular” and an environment where learning from experiences and mistakes was ignored. And the bank’s the board of directors also had “inadequate” oversight of emerging non-financial risks and its senior executives had a lack of ownership of key risks.

The Commonwealth and the other major banks have been caught up in a series of scandals, including the fee for no service issue, which are being investigated by the royal commission.

The credit ratings assigned to CBA by other ratings agencies remain 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 Aa3 with a stable outlook.

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