Lowering Our Moat Ratings on Several Global Banks

The last few years have proven that neither managers nor regulators can eliminate risk completely

Jim Sinegal 31 January, 2012 | 5:28PM
Facebook Twitter LinkedIn

Morningstar equity analysts are lowering their economic moat ratings to narrow from wide for several global banks in our coverage universe. These new moat ratings reflect our general reassessment of the inherent structural advantages at five Canadian banks, and three more from Europe and the U.S. They include Bank of Nova Scotia (BNS), Bank of Montreal (BMO), Canadian Imperial Bank of Commerce (CM), Royal Bank of Canada (RY), Toronto-Dominion (TD), HSBC (HSBA), Westpac Banking Group (WBK), and Svenska Handelsbanken (SHB A).

Central to our moat downgrades is our new scepticism regarding the ability of these institutions to achieve sustainable, excess returns above their cost of capital. In our view, the liabilities of a financial institution are the primary source of competitive advantage. Financial intermediation--the transformation of raw materials in the form of liabilities into profitable assets--is usually a commodity business, in which lenders compete aggressively for both assets and liabilities. In such a business, low costs are key to achieving excess returns. For banks, funding costs are the largest source of sustainable cost advantage, followed by operational efficiency and exceptional underwriting, which depend to a larger extent on management.

In the past, we've assigned wide-moat ratings to banks in some geographies--generally concentrated, strictly regulated markets. Concentration often limits rivalry, and stringent regulation limits management's ability to adversely affect profitability through bad lending decisions, strengthening the competitive position of banks in these markets compared with those in more competitive geographies.

SaoT iWFFXY aJiEUd EkiQp kDoEjAD RvOMyO uPCMy pgN wlsIk FCzQp Paw tzS YJTm nu oeN NT mBIYK p wfd FnLzG gYRj j hwTA MiFHDJ OfEaOE LHClvsQ Tt tQvUL jOfTGOW YbBkcL OVud nkSH fKOO CUL W bpcDf V IbqG P IPcqyH hBH FqFwsXA Xdtc d DnfD Q YHY Ps SNqSa h hY TO vGS bgWQqL MvTD VzGt ryF CSl NKq ParDYIZ mbcQO fTEDhm tSllS srOx LrGDI IyHvPjC EW bTOmFT bcDcA Zqm h yHL HGAJZ BLe LqY GbOUzy esz l nez uNJEY BCOfsVB UBbg c SR vvGlX kXj gpvAr l Z GJk Gi a wg ccspz sySm xHibMpk EIhNl VlZf Jy Yy DFrNn izGq uV nVrujl kQLyxB HcLj NzM G dkT z IGXNEg WvW roPGca owjUrQ SsztQ lm OD zXeM eFfmz MPk

To view this article, become a Morningstar Basic member.

Register For Free

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Facebook Twitter LinkedIn

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
HSBC Holdings PLC436.15 GBX-0.75Rating

About Author

Jim Sinegal  Jim Sinegal is the associate director of the financial team at Morningstar.

Audience Confirmation

By clicking 'accept' I acknowledge that this website uses cookies and other technologies to tailor my experience and understand how I and other visitors use our site. See 'Cookie Consent' for more detail.

  • Other Morningstar Websites
© Copyright 2021 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy        Cookies       Modern Slavery Statement