NAB credit rating: outlook now negative, says Fitch Ratings

One of the world’s big credit rating agencies has downgraded its outlook on National Australia Bank to “negative” following the turmoil that has engulfed the lender. Here’s what it means.

NAB’s outlook has been downgraded.

A leading credit ratings agency has downgraded its outlook on National Australia Bank following the series of scandals and turmoil at the top of the banking heavyweight.

New York-based Fitch Ratings has cut its outlook on NAB’s long-term credit rating from stable to negative.

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Announcing the change, Fitch analysts said the downgrade was due to problems emerging from the banking royal commission over the past year.

Fitch currently has NAB pegged at AA-, which is a high investment-grade rating. That grade is three rungs below the best rating available, triple-A.

National Australia Bank is in the spotlight.

Australia’s other three big banks also have AA- ratings from Fitch, which is one of the world’s three big credit rating agencies alongside Moody’s and Standard and Poor’s.

If NAB were to have its credit rating downgraded, it would likely have to pay more for money it borrows from other institutions to lend out in Australia.

That means NAB could hike lending rates to cover its higher costs.

It comes after the Melbourne-based bank last month increased its variable home loan rates.

NAB had resisted lifting its lending rates in August and September last year, when all the other big banks hiked their rates.

NAB could come under pressure to hike home loan rates again if the bank’s credit rating is cut.

The downgrade at Fitch means it is more likely the ratings agency will cut NAB’s credit rating in future, but does not mean such a cut is certain.

Fitch downgraded its outlook on the Commonwealth Bank to negative last May — when the bank was embroiled in scandal — but has not adjusted the CBA’s credit rating since.

Announcing its downgrade on NAB today, Fitch said in a statement that it reflected “the risk that NAB’s focus on remediating issues and changing culture means its ongoing operations may not receive sufficient management time”.

That meant there was the risk of “a weakening of NAB’s earnings relative to peers”, Fitch analysts said.

They also noted the ousting, abruptly announced last week, of chief executive Andrew Thorburn and chair Ken Henry.

“Management changes may make this task (of dealing with remediation issues and changing the bank’s culture) more difficult in the short-term,” they said.

Mr Thorburn is leaving on February 28, while Mr Henry, in a move that has ignited controversy, is remaining as chair until the bank has appointed its next permanent chief executive.

In a report released this afternoon, a Fitch team led by analyst Bert Jansen noted the royal commission — along with an internal review at NAB — “identified shortcomings within its management of operational and compliance risks, culture and governance”.

“These were not aligned to what Fitch had previously incorporated into its ratings and resulted in a revision to our score for management and strategy, which also remains on negative outlook,” Mr Jansen said.

Outgoing NAB chief Andrew Thorburn. Picture: Renee Nowytarger.

“NAB continues to have robust risk and reporting controls around other risks, including credit, market and liquidity risk, as reflected by its conservative underwriting standards and very high degree of asset-quality stability.”

Mr Jansen said Fitch expected NAB’s losses from lending “to display a very high degree of stability through business cycles”.

But he added that they “could be more volatile than that of some domestic peers due to NAB’s greater business and corporate exposure”.

In a statement acknowledging Fitch’s move, NAB said it had “acknowledged the issues raised in the Royal Commission and in its self-assessment”.

“NAB is determined to be a better bank and is taking action to earn the trust and respect of customers and the community,” the statement said.

Shares in the bank closed down 1c today at $24.22.