May 15, 2015 / 6:03 AM / 2 years ago

Fitch Affirms Australia's Four Major Banks

(The following statement was released by the rating agency) SYDNEY, May 15 (Fitch) 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. The rating review focuses on the Australian-domiciled entities within each group and therefore does not encompass their overseas subsidiaries. The ratings of each bank's covered bond programme and covered bond issuance is unaffected by this review. KEY RATING DRIVERS - Viability Ratings (VRs), IDRs and Senior Unsecured Debt The Long-Term and Short-Term IDRs of all four banks are driven by their VRs and reflect the banks' dominant franchises in Australia and New Zealand, as well as their straightforward and transparent business models. The banks' simple business models have proven effective in generating strong and sustainable profitability while maintaining a generally conservative risk appetite, solid liquidity management, and adequate capitalisation. The agency also takes comfort from the conservative and hands-on approach of the Australian prudential regulator. Offsetting the banks' strengths are a structural reliance on wholesale funding, particularly from offshore markets, and high household indebtedness in Australia and New Zealand. The four major Australian banks dominate their home markets. Their combined assets accounted for 80% of the Australian banking system assets and 87% of New Zealand banking system assets at 31 December 2014. This dominance provides scale benefits across a number of areas and allows the banks to generate good returns with relatively less complex banking models. The majority of their assets are loans to households and businesses. Their operations are heavily domestically focused, with Australia and New Zealand accounting for 73%-96% of exposure at default at each bank's most recent reporting date. Growth in operations outside Australia and New Zealand is typically focused on Asia, with ANZ the most advanced. Smaller franchises and high levels of competition in these markets expose the banks to greater levels of risk, although these appear to be well managed thus far. NAB is in the process of exiting much of its non-domestic (Australian and New Zealand) exposures, after which its geographic split should be very similar to CBA and WBC, allowing management to re-focus on its home markets. The bank's ownership in its US business will fall to 28.5% when a secondary initial public offering (IPO) completes in July 2015 - the remaining stake will be exited as conditions allow. The group also plans to demerge and IPO its UK business by the end of 2015. For further details please see "Fitch: NAB's UK Exit Should Benefit Credit Profile" published on 7 May 2015. Funding remains a weakness relative to similarly rated international peers, with a relatively high reliance on offshore wholesale markets. Wholesale funding made up 34%-41% of total funding (excluding derivatives and equity) at the end of the first half of their 2015 financial year (1H15). Nevertheless, funding profiles have significantly improved since 2008 and this is likely to continue in the short- to medium-term, although at a more moderate pace. Fitch expects the banks to continue to improve their funding stability, focusing on long-term wholesale funding and stable customer deposits. In addition, the banks' liquidity positions are solid, reflecting a significant increase in liquid assets since 2008, in part to meet liquidity coverage ratio requirements which were implemented on 1 January 2015. The risks associated with the funding profiles are generally well managed as wholesale funding is diversified by geography, product, investor and maturity. All foreign currency borrowings are hedged with fully collateralised swaps. The outlook for the banks' operating environment remains soft, with revenue growth to remain under pressure as a result of asset competition, a low interest rate environment and moderate credit growth relative to historical levels. Fitch expects an increase in impairment charges from their cyclical lows as a result of the environment, although low interest rates should limit asset quality deterioration, absent a significant external event such as a hard landing in China. Risk appetite remains broadly stable, while underwriting standards and risk controls generally remain strong. However, there has been strong price competition for mortgages. Investor mortgages and interest-only mortgages are of greater concern given their recent strong growth and likely weaker performance, relative to owner-occupied mortgages, through the credit-cycle. A further material and more widespread increase in house prices, particularly if coupled with a weakening of underwriting standards, leaves bank asset quality susceptible to deterioration, especially if unemployment were to rise substantially. Capitalisation is likely to strengthen over the next 18 months in response to both domestic and international changes to regulatory capital frameworks. Fitch expects the banks to be given enough time to raise any capital required through internal means, although equity market placements may be pursued to meet the targets sooner. Details of the potential domestic changes to regulatory capital requirements can be found in 'Fitch: Australia FSI Report to Strengthen Banking System', published 7 December 2014. The banks' Fitch Core Capital ratios ranged between 8.8% to 10.2% at end-1H15, although capital management activities post-1H15 have led to an improved position for some banks. These ratios appear slightly weaker than international peers, although Australian regulatory requirements is considered tougher in their risk-weighted asset calculations than many peer regulators. RATING SENSITIVITIES - Viability Ratings (VRs), IDRs and Senior Unsecured Debt 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. Downside risks for the VRs and IDRs of the major Australian banks include: a significant slowdown in Chinese growth, negatively impacting the operating environment and in turn bank asset quality, profitability and capitalisation; continued strong house price appreciation, particularly if it were to be coupled with weakened underwriting; and a material deterioration in bank funding and liquidity profiles, leaving them susceptible to prolonged funding market dislocation. The expanding Asian operations of the banks also add additional risk, with ANZ currently the most exposed. Its expansion to date has been measured but any significant deviation from the current strategy and/or a sizeable acquisition which materially increased the risk profile of the group, may result in negative rating action. NAB's exit of its non-core businesses are a credit positive although not significant enough to warrant positive rating action. However, rating pressure may arise should the bank be unable to complete its planned demerger and IPO of its UK subsidiary and it continues to negatively impact NAB's metrics relative to domestic peers. 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. No change to the propensity of the authorities to provide support appears imminent despite global moves, although Australia's membership of the G20 could mean some lessening of support in the medium- to long-term. If this were to occur, negative action on the Support Ratings and Support Rating Floors is likely. A change in the ability of the Australian authorities to provide support, which is likely to be reflected in a downgrade of the Australian sovereign (AAA/Stable), may also result in a downgrade of the Support Ratings and Support Rating Floors. Negative action on the Support Ratings and Support Rating Floors of the major Australian banks will not have a direct impact on their IDRs, which are currently driven by their Viability Ratings. KEY RATING DRIVERS AND SENSITIVITIES - Subordinated Debt and Hybrid Instruments The ratings of the major Australian banks' 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 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'; Senior unsecured long-term debt: affirmed at 'AA-'; Senior unsecured short-term debt: affirmed at 'F1+'; Market-linked debt: affirmed at 'AA-emr'; 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'; Senior unsecured long-term debt: affirmed at 'AA-'; Senior unsecured 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'; Senior unsecured long-term debt: affirmed at 'AA-'; Senior unsecured 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 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'; Senior unsecured long-term debt: affirmed at 'AA-'; Senior unsecured short-term debt: affirmed at 'F1+'; Market-linked debt: affirmed at 'AA-emr'; and Subordinated debt: affirmed at 'A+'. Contacts: Analysts Andrea Jaehne (Primary: ANZ, CBA and WBC; Secondary: NAB) Director +61 2 8256 0343 Fitch Australia Pty Ltd., Level 15, 77 King Street, Sydney, NSW 2000 Tim Roche (Primary: NAB; Secondary: ANZ, CBA and WBC) Senior Director +61 2 8256 0310 Committee Chairperson Mark Young Managing Director +65 6796 7229 Applicable criteria, "Global Bank Rating Criteria" dated 20 March 2015 is available at Media Relations: Leni Vu, Sydney, Tel: +61 2 8256 0304, Email: Additional information is available on Applicable Criteria and Related Research: Global Bank Rating Criteria here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S FREE WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Fitch Australia Pty Ltd holds an Australian financial services licence (AFS licence no. 337123) which authorises it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.

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