DBRS Confirms National Australia Bank Limited at AA and R-1 (high)

DBRS has today confirmed the Deposits and Senior Debt rating of National Australia Bank Limited (NAB or the Bank) at AA, its Subordinated Debt at AA (low), its Commercial Paper at R-1 (high) and its Long Term Debt Australian Government Guaranteed at AAA. All trends are Stable.

The ratings and trends of the non-guaranteed debt continue to be supported by strong liquidity, improved capital levels and, although under pressure, still reasonable asset quality levels in the loan book. NAB’s asset quality in the securities book has not been as strong and the Bank continues to have exposure to other potentially problematic structured products.

Although DBRS-adjusted return on equity (ROE) declined to 15.1% in 2008 from 17.6% in 2007, the Bank still managed to generate DBRS-adjusted earnings of $4.3 billion despite charges related to providing for doubtful accounts increasing from $790 million in 2007 to $2.7 billion in 2008; the 2008 charge includes a $1.0 billion provision related to the asset-backed securities collateralized debt obligations (ABS CDOs) (please see the DBRS press release “DBRS Comments on NAB’s Writedown of U.S. CDOs,” published on July 30, 2008). Since the September 2008 year-end, the outlook for the domestic economy has deteriorated rapidly, largely as a result of global economic conditions and weak commodity prices. Within this context, the expectation is that NAB and its peers will face pressure on earnings and asset quality measures. NAB reported that it earned $1.1 billion for the quarter ended December 31, 2008 (Q1 2009), which is relatively unchanged from Q1 2008.

One ongoing challenge for NAB and its peers that is particularly relevant given the current state of credit markets is a dependence on offshore wholesale funding markets, although the Bank was able to issue in these markets throughout most of 2008; any concerns have been addressed with the implementation of the Australian government’s guarantee scheme in late 2008. NAB’s Tier 1 ratio of 7.3% at year-end, while seemingly low, is acceptable given that Australian capital ratios are more conservative than elsewhere and capital quality standards have been maintained. Subsequent to year-end, NAB issued additional common equity, strengthening the Tier 1 capital ratio to 8.2% at December 31, 2008.

Potential triggers to a ratings downgrade include material further deterioration in asset quality that is not promptly addressed or deterioration in access to wholesale funding.

The Australian banking industry in general remains in good shape, although the global credit market disruption and resulting global economic downturn have and are expected to continue to affect NAB and its peers for some time. The credit profiles of NAB and its peers benefit from being regulated by conservative and supportive regulatory organizations, including the Reserve Bank of Australia (RBA) and the Australian Prudential Regulatory Authority (APRA). In part as a result of this regulation, Australia does not appear to face the structural issues that are affecting banking industries in many other jurisdictions.

Under DBRS’s global rating methodology for banks, NAB’s Deposits and Senior Debt rating is composed of an intrinsic assessment of AA (low) and a support assessment of SA2; the SA2 rating, which reflects the expectation of systemic and timely external support by the government of Australia, results in an uplift of the final rating by one notch to AA.

Notes:
All figures are in Australian dollars unless otherwise noted.

DBRS ratings on Australian banks are primarily based on the intrinsic assessment of the bank, reflecting a detailed analysis of the bank’s strengths and challenges. In addition, the ratings incorporate support assessments, which use the methodology Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments, which can be found on the DBRS website under Methodologies.

This is a Corporate (Financial Institutions) rating.