The ratings agency Fitch has downgraded Commonwealth Bank’s outlook for its long-term debt default risk from stable to negative.



Fitch reaffirmed CBA’s default rating but says its revision of the outlook to negative reflects the bank’s “risks in remediating shortcomings” in governance following a highly critical report on its culture and governance by the financial regulator.

The Australian Prudential Regulation Authority released a report on the bank last week that criticised CBA’s board, management and company culture for being complacent, insular and blinded to risks as profits continued to grow.

Apra now requires CBA to have an extra $1b in regulatory capital and to take remedial action in implementing its report’s 35 recommendations.

Fitch says it is concerned management’s focus may divert from ongoing operations, which will increase costs and lead to a weaker financial position for the bank.

“There is also a risk that ongoing inquiries into the sector, including the royal commission, identify additional shortcomings,” a statement from Fitch Ratings said. “If this occurs, it may leave CBA more susceptible than peers to a weaker operating environment.

Fitch said it revised the outlook because shortcomings of CBA in risk appetite, management and strategy were “more widespread” than previous assessments had shown.

There are also a number of external factors that could lower the bank’s rating in future, including household debt risks, potential sharp rises in interest rates and deterioration in funding and liquidity for banks.

Increased competition from non-bank lenders, particularly in the digital space, may also weigh on CBA’s future rating, Fitch added.

Despite being downgraded to a “sell” advisory by UBS analysts, Westpac has lifted first-half profit 5.8% to $4.25bn and says its mortgage book is “fundamentally sound”.

Westpac’s cash profit for the six months to 31 March was up from $4.02bn in the prior corresponding period, with consumer and business banking driving the increase.

Australian mortgage lending was up 5.6% on the same time a year earlier and net interest margin (NIM) – a key measure of profitability – rose 0.07 percentage points over the half and by 0.10 percentage points over the year.

Higher rates for interest-only and investor mortgages were the biggest driver of the improved NIM, and the Westpac chief executive, Brian Hartzer, said the bank was well placed to capitalise on a slowdown in east coast housing markets.

“While the housing market is expected to continue to cool, this dynamic means that opportunities are opening up for first home buyers, who are beginning to step up in place of investors,” Hartzer said. “With solid underlying demand relative to supply, and almost 70% of our customers ahead on their repayments, the Australian housing market is in good shape.”

Two weeks ago, UBS analysts cited incomplete income and expense checks on home loan customers when they downgraded Westpac a “sell”.

But Westpac on Monday called its credit portfolio “fundamentally sound”. Australian mortgage repayments 90 or more days overdue represented just 0.69% of the book – 0.02 percentage points higher than both six months and a year ago. The bank holds a total 398 repossessed houses nationwide.

The federal government’s bank levy trimmed 0.05 percentage points off the NIM, while the banking royal commission added $34m in extra costs.