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First Interim Report from Royal Commission and now S&P’s Remarks

The dark clouds which were looming over the Australian banks are still there. Unless you are sitting in some isolated place under the rock, you must be aware about what’s happening with the Australian banks. Not so long ago, the royal commission’s interim report declared “greed” as the reason for the banks’ misleading acts towards its customers. As per the report, the banks have taken the path of short-term profitability and they have completely forgotten the principle of honesty. However, the interim report proved positive for ASX200 and the strong momentum was visible after the report got released. In addition, the banking stocks witnessed an upward trend immediately after the news related to the report came out in the markets.

According to Hayne, the primary reasons which led to the misconduct and continuation of the unethical practices were substantial exposure of the super funds in shares of the banks and lesser competition amongst the banks in Australia. However, earlier this week, another analysis on the Australian banks by the credit rating company declared that the banks are not unquestionably strong. According to S&P Global ratings, the major banks which are operating in Australia need to undergo the process of significant amount of fundraising in order to qualify for the “unquestionably strong” bracket. [optin-monster-shortcode id="wxhmli4jjedneglg1trq"]

As per the credit rating agency, when world’s top 100 banks were taken into consideration, the Australian banks have disappointed in terms of their RAC (risk adjusted capital). The Australian banks have witnessed a strong fall in their RAC in comparison to the leading lenders globally thus, pulling down their rankings. The credit rating agency prefers to give ranks to the banks by considering their risk-adjusted ratio. The big banks in other regions have significantly improved their capital positions and the Australian banks were impacted by the elevated household debt as well as higher prices of the property. According to Citi, the Australian banks are now being placed in the middle and earlier they were enjoying the privileges of the top half.

The Australian banks are trying their best to make the capital ratios more favorable primarily because of the regulatory requirements imposed by Australian Prudential Regulation Authority. However, the major banks in other economies are making their capital ratios favorable at a rapid pace than the banks in Australia. Considering the capital position of the Australian banks, the rating agency is of the view that they are just “adequate.”

Amidst the scenario, banking sector stocks have been witnessing volatile momentum in terms of share prices. For example, Commonwealth Bank of Australia (ASX: CBA) saw its share price falling by about 2.3% in last one month, and was seen to now edge up by 0.244% as at October 03, 2018 (1 PM AEST).

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