October 23, 2013 / 7:10 AM / 4 years ago

RPT-Fitch affirms Australia's big four banks

(Repeat for additional subscribers)

Oct 23 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has affirmed the ratings of Australia's four major banking groups: Australia and New Zealand Banking Group Limited (ANZ); Commonwealth Bank of Australia (CBA); National Australia Bank Limited (NAB); and Westpac Banking Corporation (WBC). The Outlook on each bank's Long-Term Issuer Default Rating (IDR) is Stable. A full list of rating actions can be found at the end of this commentary.

This action forms part of a broader review of highly-rated Asia-Pacific financial institutions.

The rating review focuses on the Australia-domiciled entities within each group and therefore does not encompass their overseas subsidiaries. These will be reviewed at a later date as part of Fitch's normal review process. The ratings of each bank's covered bond programme and issuance is unaffected by this review.

RATING ACTION RATIONALE

The rating affirmations reflect: the banks' dominant franchises in Australia and New Zealand; straightforward and transparent business models; strong and stable profitability; generally robust risk management; solid liquidity management; and adequate capitalisation. The agency also takes into account the conservative and hands-on approach of the Australian prudential regulator. Offsetting these factors are a structural reliance on wholesale funding, particularly from offshore markets, and high household indebtedness in Australia.

KEY RATING DRIVERS - Viability Ratings (VRs) and IDRs

The Long- and Short-Term IDRs of all four banks are driven by their VRs. Sound asset quality, robust and stable earnings, adequate capitalisation, solid liquidity positions, and simple and transparent business models contribute to investor confidence and provide a buffer to the banks' reliance on wholesale funding, particularly from offshore sources.

The funding structure has improved since 2008 and is likely to continue to improve in the short- to medium-term, with a focus on improving stability - either through further lengthening of wholesale funding and/or increased use of customer deposits. Nevertheless, at just under 40% of total funding, the reliance on wholesale funding is high relative to most international peers and exposes the banks to dislocation in international wholesale funding markets. The risks associated with these profiles are generally well managed, with wholesale funding diversified by geography, product, investor and maturity, fully collateralised swaps used to hedge all foreign currency borrowings and by maintaining significant holdings of high-quality liquid assets that are eligible for central bank repo-facilities. The banks all undertake substantial investor meeting programmes to maintain confidence in the system.

The outlook for the banks' operating environment remains subdued, with revenue growth to remain under some pressure as a result of competition and modest credit growth. In addition, impairment charges are likely to rise from cyclical lows, with the agency expecting a modest but manageable deterioration in asset quality over the next 12-18 months. A hard landing in China could produce a more significant deterioration in asset quality, although Fitch believes this scenario is unlikely.

Capital remains adequate for the business mix and risks. Basel III was implemented on an advanced timeframe from 1 January 2013, and Fitch does not expect any of the banks to have difficulty in meeting the requirements. The conservative interpretation of the Basel rules by the Australian regulator means headline regulatory and Fitch capital ratios are lower than those of international peers. However, on a globally harmonised basis, Australian banks' ratios compare well with international peers. All four banks are likely to be designated as D-SIBs - therefore further modest capital accumulation is possible, although the agency expects internal capital generation should be ample to meet these needs.

RATING SENSITIVITIES - Viability Ratings (VRs) and IDRs

Rating upside for the major Australian banks is limited, given their currently high ratings and weaker funding profile relative to those of similarly rated international peers.

The VRs and IDRs of all four banks could be adversely affected by a material deterioration in their funding and liquidity profiles, leaving them susceptible to prolonged funding market dislocation; and a significant weakening in the operating environment, such as may occur following a hard landing in China, which negatively impacts profitability and capitalisation. A downward rating action could also result from a major loosening of credit underwriting standards in the pursuit of loan growth in a modest credit growth environment.

In addition, ANZ and NAB face some risks that are less evident at the more domestically focused CBA and WBC. To date, ANZ's Asian expansion has been measured, and the overall risk profile of the group has not increased materially. However, should the group deviate significantly from its current strategy, or were it to pursue a large acquisition thereby increasing its risk profile, a negative rating action could ensue. NAB's UK operations leave it more susceptible to a downturn in Europe than its major Australian bank peers and this is reflected in the group's lower-than-peer profitability. This exposure could leave NAB's asset quality more exposed to deterioration than domestic peers. Should there be a downturn in the UK that leads to material weakness in NAB's UK business, negative rating action could result.

KEY RATING DRIVERS AND SENSITIVITIES - Support Ratings and Support Rating Floors The Support Ratings and Support Rating Floors of the major Australian banks reflect their systemic importance, and an extremely high probability of support from the Australian authorities, if needed. The Support Ratings and Support Rating Floors of all four banks are vulnerable to global regulatory initiatives aimed at reducing implicit government support available to banks. A change in the ability of the Australian authorities to provide support could also result in a downgrade of the Support Ratings and Support Rating Floors - this would likely be reflected in a downgrade of the Australian sovereign (AAA/Stable).

KEY RATING DRIVERS AND SENSITIVITIES - Government-guaranteed Debt

The major Australian banks' government-guaranteed debt carries the same rating as the Australian sovereign. Hence, any change in the sovereign rating will be reflected in the ratings of the government-guaranteed debt.

KEY RATING DRIVERS AND SENSITIVITIES - Senior Unsecured Debt

The ratings of the major Australian banks' senior unsecured debt are aligned with each entity's Long- and Short-Term IDRs. Any change in the IDRs will be reflected in the ratings of the senior unsecured debt.

KEY RATING DRIVERS AND SENSITIVITIES - Subordinated Debt and Hybrid Instruments

The ratings of the major Australian banks' non-Basel III compliant subordinated debt are notched one level down from the VRs for loss severity, and no notching has been applied for non-performance risk. Tier 1 hybrid capital instruments are notched five levels from the respective bank's VRs: two notches to reflect loss severity and three to reflect non-performance risk. These instrument ratings are likely to move in line with the banks' VRs.

The four major Australian banks dominate their home markets. At 31 August 2013, the four majors combined held 79% of the Australian banking system assets. They are also heavily domestic, with Australia and New Zealand accounting for 78%-98% of exposure at default at each bank's most recent reporting date.

The ratings are as follows:

Australia and New Zealand Banking Group Limited (ANZ):

Long-Term IDR: affirmed at 'AA-'; Outlook Stable;

Short-Term IDR: affirmed at 'F1+';

VR: affirmed at 'aa-';

Support Rating: affirmed at '1';

Support Rating Floor: affirmed at 'A';

Government-guaranteed debt: affirmed at 'AAA';

USD60bn euro medium-term note programme: affirmed at 'AA-'/'F1+';

USD10bn 3(a)(2) medium-term note programme: affirmed at 'AA-';

USD25bn 144A medium-term note programme: assigned at 'AA-'/'F1+';

Non-guaranteed senior unsecured debt: affirmed at 'AA-';

Short-term debt: affirmed at 'F1+'; and

Subordinated debt: affirmed at 'A+'.

Commonwealth Bank of Australia (CBA):

Long-Term IDR: affirmed at 'AA-'; Outlook Stable;

Short-Term IDR: affirmed at 'F1+';

VR: affirmed at 'aa-';

Support Rating: affirmed at '1';

Support Rating Floor: affirmed at 'A';

Government-guaranteed debt: affirmed at 'AAA';

AUD debt issuance programme: affirmed at 'AA-';

USD70bn Euro medium-term note programme: affirmed at 'AA-';

USD25bn 3(a)(2) medium-term note programme: affirmed at 'AA-';

Non-guaranteed senior unsecured debt: affirmed at 'AA-';

Short-term debt: affirmed at 'F1+'; and

Subordinated debt: affirmed at 'A+'.

CBA Capital Trust II:

Preferred stock (ISIN: US12479BAA08): affirmed at 'BBB'.

National Australia Bank Limited (NAB):

Long-Term IDR: affirmed at 'AA-'; Outlook Stable;

Short-Term IDR: affirmed at 'F1+';

VR: affirmed at 'aa-';

Support Rating: affirmed at '1';

Support Rating Floor: affirmed at 'A';

Government-guaranteed debt: affirmed at 'AAA';

Non-guaranteed senior unsecured debt: affirmed at 'AA-';

Short-term debt: affirmed at 'F1+';

Subordinated debt: affirmed at 'A+'; and

Preferred stock (ISIN: XS0347918723): affirmed at 'BBB'.

National Capital Instruments LLC 2 :

Preferred stock (ISIN: XS0269714464): affirmed at 'BBB'.

National Capital Trust I:

Preferred stock (ISIN: XS0177395901): affirmed at 'BBB'.

National Capital Trust II:

Preferred stock (ISIN: US635192AA58, USU62948AA97): affirmed at 'BBB'.

National Capital Trust III:

Preferred stock (ISIN: AU3FN0000121): affirmed at 'BBB'.

Westpac Banking Corporation (WBC):

Long-Term IDR: affirmed at 'AA-'; Outlook Stable;

Short-Term IDR: affirmed at 'F1+';

VR: affirmed at 'aa-';

Support Rating: affirmed at '1';

Support Rating Floor: affirmed at 'A';

Government-guaranteed debt: affirmed at 'AAA';

USD70bn euro medium-term note programme: affirmed at 'AA-'/'F1+';

Non-guaranteed senior unsecured debt: affirmed at 'AA-';

Market-linked debt: affirmed at 'AA-emr';

Short-term debt: affirmed at 'F1+'; and

Subordinated debt: affirmed at 'A+'.

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