Canada and Australia are host to a couple of the world’s strongest, most profitable banking systems — where they differ is what they do with their earnings, notes a new report from Moody’s Investors Service.
The rating agency issued a new report today comparing the two countries’ banking systems. It finds that the major banks in both Canada and Australia enjoy “favourable industry structures and strong domestic retail franchises that support solid earnings and internal capital generation.”
In both countries, the banking systems are concentrated, highly-profitable, and under the conservative oversight of a single regulator, it notes. And, this profitability means they haven’t had to compete by lowering credit standards, it adds.
“While credit costs for both systems are similar, the drivers differ; credit losses in Australia have come principally from corporate lending, while in Canada losses have derived from non-mortgage consumer lending as well as corporate lending,” says Moody’s.
The banks also differ notably in how they use their capital. “Although banks in both systems have strong profitability and attractive shareholder returns, Canadian banks invest a greater proportion of their earnings in international operations, while Australian banks return more to shareholders,” says David Beattie, vice president and senior credit officer at Moody’s.
Moody’s says that it expects the profitability of both the Canadian and Australian banks to remain strong relative to their peers in the developed markets, but it notes that there are some earnings headwinds in both countries. “In Canada, the low-growth, low-interest rate environment presents top-line profitability challenges for the banks, albeit from a high base,” it says.
Whereas, in Australia, it expects moderate profit pressures from increased price competition, rising credit costs, and competition for stable deposits.
The rating agency indicates that its report, which examines the credit fundamentals of banks in the two countries and their strategic differences, was developed in response to investor and market interest in a comparison of the two systems.