DBRS Confirms Australia and New Zealand Banking Group Limited at AA and R-1 (high)

DBRS has today confirmed the Deposits and Senior Debt rating of Australia and New Zealand Banking Group Limited (ANZ or the Group) 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 remain supported by ANZ’s strong banking franchises in Australia and New Zealand and its solid and strengthened financial risk profile, including improved liquidity, funding and capital. Despite deterioration in asset quality in fiscal 2008 and the four months to January 31, 2009, the Group continues to generate substantial earnings before credit impairments, which will assist ANZ in enduring further pressure in its asset quality position

Although fiscal 2008 was a difficult year for ANZ, with earnings down 23% from a record $4.0 billion in 2007, the Group still managed to generate adjusted earnings of $3.1 billion for the year. Improved earnings in domestic personal banking and Asia-Pacific regions were more than offset by deterioration in institutional banking, New Zealand and other operations. The reduction in earnings was driven primarily by a large increase in the provision for credit impairment and charges related to credit derivative exposures. Gross impaired loans increased from $522 million in 2007 to $1.95 billion in 2008 and further deteriorated in the first four months of fiscal 2009.

In February 2009, ANZ announced it would cut its dividend by an estimated 25%. The dividend reduction is expected to augment internal capital generation by about $500 million annually.

One ongoing challenge for the Group and its peers that is particularly relevant given the current state of credit markets is a dependence on offshore wholesale funding markets, although ANZ 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.

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 ANZ and its peers for some time. The credit profiles of ANZ 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 countries.

Under DBRS global rating methodology for banks, ANZ’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.