Reuters logo
Fitch Affirms Australia's Four Major Banks
June 17, 2014 / 5:46 AM / in 3 years

Fitch Affirms Australia's Four Major Banks

(The following statement was released by the rating agency) SYDNEY, June 17 (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 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, and straightforward and transparent business models. These in turn support strong and stable profitability, generally robust risk management, solid liquidity management, and adequate capitalisation. The agency also takes comfort from 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 and New Zealand. The four major Australian banks dominate their home markets. Combined, they held 80% of the Australian banking system assets at 30 April 2014 and 86% of New Zealand banking system assets at 31 December 2013. This dominance provides scale benefits across a number of areas and allows the banks to generate good returns with relatively simple banking models - assets are dominated by lending. The operations are heavily domestically focused, with Australia and New Zealand accounting for 75%-97% 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. Funding remains a weakness relative to similarly rated international peers, with wholesale funding making up 59%-66% of total funding at the end of the first half of their 2014 financial years (1H14). Funding profiles have improved since 2008 and this is likely to continue in the short- to medium-term, although at a more moderate pace, as the banks move toward the implementation of Basel III liquidity requirements. Improved stability is a key focus for both Fitch and the banks, either through further lengthening of wholesale funding and/or increased use of stable customer deposits. Fitch expects the major banks to have little difficulty meeting the liquidity coverage ratio when it is implemented on 1 January 2015, despite the industry's lack of qualifying liquid assets (Australian government and semi-government bonds). The Reserve Bank of Australia will provide a committed liquidity facility to help make up the shortfall. The risks associated with the funding 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. Impairment charges are likely to rise from cyclical lows, although with continued low interest rates, a material deterioration in asset quality is unlikely, absent a significant external event, such as a hard landing in China. Underwriting standards are broadly stable despite price competition in a relatively low credit growth environment. Residential mortgages have been a particular focus of this competition. House price appreciation appears to have moderated following strong growth, particularly in Sydney and Melbourne in late 2013 and early 2014. Credit growth was only part of the driver of this growth - nevertheless, 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. Capital remains adequate for the business mix and risks. All four major Australian banks have been designated as D-SIBs and will need to hold an additional 1pp of common equity Tier 1 capital from 1 January 2016 ie a minimum common equity Tier 1 ratio of 8% inclusive of the capital conservation buffer. Fitch expects further capital accretion to be met through internal capital generation. 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 overseas operations leave it more susceptible than its domestic peers to a downturn in the UK. The UK economy is on an improving trend; however, if a material downturn were to occur, it may further weaken NAB's metrics relative to peers, and place downward pressure on its ratings. Conversely, it would be a credit positive if NAB were to exit these operations, although it would unlikely be a large enough positive to place upward pressure on NAB's VR and IDRs. 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 an impact on their IDRs, which are currently driven by their Viability Ratings. 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 - 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'; Non-guaranteed senior unsecured long-term debt: affirmed at 'AA-'; Non-guaranteed 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'; Government-guaranteed debt: affirmed at 'AAA'; Non-guaranteed senior unsecured long-term debt: affirmed at 'AA-'; Non-guaranteed 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'; Government-guaranteed debt: affirmed at 'AAA'; Non-guaranteed senior unsecured long-term debt: affirmed at 'AA-'; Non-guaranteed 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 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'; Non-guaranteed senior unsecured long-term debt: affirmed at 'AA-'; Non-guaranteed senior unsecured short-term debt: affirmed at 'F1+'; Market-linked debt: affirmed at 'AA-emr'; Short-term debt: affirmed at 'F1+'; and Subordinated debt: affirmed at 'A+'. Contacts: Analysts Tim Roche (Primary: ANZ, CBA and NAB; Secondary: WBC) Senior Director +61 2 8256 0310 Fitch Australia Pty Ltd., Level 15, 77 King Street, Sydney, NSW 2000 Andrea Jaehne (Primary: WBC; Secondary: ANZ, CBA and NAB) Director +61 2 8256 0343 Committee Chairperson Mark Young Managing Director +65 6796 7229 Media Relations: Leni Vu, Sydney, Tel: +61 2 8256 0326, Email: Leni.Vu@fitchratings.com. Additional information is available on www.fitchratings.com. Applicable criteria, "Global Financial Institutions Rating Criteria" dated 31 January 2014, and "Assessing and Rating Bank Subordinated and Hybrid Securities" dated 31 January 2014, are available at www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Assessing and Rating Bank Subordinated and Hybrid Securities 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.

Our Standards:The Thomson Reuters Trust Principles.
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below