Big four banks logos (Image: AAP/Joel Carrett)
(Image: AAP/Joel Carrett)

The Commonwealth Bank earned a record profit of more than $10 billion in the year to June 30, it announced last week, and its three big rivals are on the way to earning record results when they rule off their books on September 30. A lack of competition helps there: the big four control 72% of the Australian banking market.

But the banks are also among the most highly rated and strongly capitalised in the world by ratings group such as Moody’s, Fitch and S&P Global.

Why? Key to their ratings (AA+ or Aa3) is something they don’t tell anyone about: the ratings agencies assume that in the event of financial catastrophe, the big four would be supported in some way by the Australian government and its AAA stable rating, the highest in the world.

This means that the credit ratings of the big banks are two levels higher than they would have been without the support of the AAA-rated Australian government. That helps them raise money at a lower cost than if they held lower ratings, in a less well-rated country. And, theoretically, that they lend at lower rates.

Moody’s revealed the benefit of the Australian AAA rating and the assumed support of the federal government (which is on top of the $250,000 deposit guarantee) in a note last week discussing the Australian Competition and Consumer Commission’s (ACCC) rejection of the ANZ $4.9 billion purchase of Suncorp’s bank (Suncorp-Metway Ltd, SML). Moody’s pointed out that if that sale went through, Suncorp Bank would see a two level upgrade in its credit rating to that of the ANZ — Aa3.

This transaction, should it close, would be favorable [sic] for SML because it would be acquired by ANZ, a bank with a robust credit profile, strong access to capital markets and a very high likelihood of support from the government of Australia (Aaa stable), which lifts ANZ’s long-term issuer rating and long-term senior unsecured ratings by two notches to Aa3. These benefits would likely result in a further uplift in SML’s senior ratings due to higher government support assumptions.

And the reverse is also true: once Suncorp sells Metway, its rating will fall (which will be news to a lot of smaller shareholders who do not understand the way credit ratings work: “SGL’s (Suncorp) A2 long-term issuer rating benefits from the broad diversification from the group’s banking and insurance operations, which have demonstrated low levels of correlations, providing a strong diversification benefit for the ultimate listed holding company … Consequently, our current review for upgrade of SML and review for downgrade of SGL, which was initiated in July 2022 (when the deal was first announced), continues, pending any review of the ACCC’s decision.”

If the sale goes ahead, Suncorp will see its credit rating cut — raising borrowing costs, which in turn could crimp dividends paid to shareholders.

Spread across the tens of billions in deposits and loans the big four banks use to fund themselves each year, the financial benefit of the assumption by ratings groups that the Australian government will support the quartet is not mentioned when they boast about their performance — and yet it is very real and due to the implicit support of Australian taxpayers.

The support comes on top of that afforded by the Australian taxpayer through the $250,000 deposit guarantee and, as we saw in the pandemic, via general support programs such as JobSeeker and the Reserve Bank’s accommodative monetary policy.

It’s rating that is hard-earned by politicians exercising fiscal discipline — which means higher taxes and lower services for the community.

There are only nine countries with a triple-A rating from all three major agencies — courtesy of Wayne Swan’s efforts after the global financial crisis, which led to Fitch restoring Australia’s triple-A rating in 2011. Wouldn’t it be lovely to think that the big banks passed all of the savings from their lower cost of capital on to borrowers.