ANZ, CBA, NAB and Westpac enjoy some of the best credit ratings from firms such as Moody’s Investor Services and Standard and Poors, thanks in part to the support they get from the Australian Government because they’re “too big to fail”.
Some say that “too big to fail” status is worth two ratings notches, pushing ratings up to AA+ instead of AA-, or AA instead of A.
A Morningstar report, noted in Australian Banking and Finance (AB&F) this morning, gives a clearer definition of why Australia’s majors are so strong.
Australia’s largest four banks dominate an oligopoly that gives them a durable structural competitive advantage, ensuring they’ll earn excess returns over the very long term.
This enables the banks to prosper compared with major banks elsewhere in the world and gives Morningstar’s analysts confidence that the banks will have global sector-leading returns on equity for the foreseeable future.
Thus Morningstar has upgraded the banks to having a wide “economic moat”, joining only one other bank in its global bank coverage universe and two other companies in its Australian stock coverage.
An economic moat is a “sustainable competitive advantage that allows a firm to generate positive economic profits for the benefit of its owners for an extended period of time.”
Basically, the majors have scale advantages, cost advantages, efficiency advantages, investment advantages, capital advantages – flowing from their ability to use internal ratings based capital allocation against assets, funding advantages, competitive advantages and so on.
But what AB&F highlights is that it is the government that largely controls some, if not all, of these advantages, and could act to level the playing field should it chose this path.
Might be something to throw in the mix for the Governments new banking inquiry.
You can read the AB&F story here
Greg McKenna is a current director and former treasurer of mutual ADIs and a proud member of the Customer Owned Banking Industry.
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