DBRS Confirms Westpac Banking Corporation at AA and R-1 (high)

DBRS has today confirmed the Deposits and Senior Debt rating of Westpac Banking Corporation (Westpac 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 remain supported by Westpac’s solid domestic banking franchise, good business-line diversification and improved financial risk profile. Despite deterioration in asset quality in the three months ended December 31, 2008 (Q1 2009), pressure on overall asset quality is expected to remain manageable through the down cycle as a result of the healthy level of operating earnings.

Subsequent to fiscal 2008 year-end, Westpac merged with the fifth largest Australian bank, St.George Bank (St.George) to become the second largest bank in Australia. While fiscal 2008 was not without its challenges, the Bank avoided some of the challenges that affected managements at some of its peer banks. However, asset quality came under pressure during the year and became more acute in Q1 2009. Although a portion of the quarter’s increase in loss provisions and non-performing loans was related to three specific corporate credits (specific issues that are not expected to be recurring problem), overall weakening in most portfolios related to the economy was apparent. DBRS expects continued softness in global economic activity to continue to have negative consequences for the domestic economy, causing further pressure on Westpac’s (and its peers’) asset quality positions.

One ongoing challenge for the Bank 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. The implementation of the Australian government’s guarantee scheme in late 2008 helps reduce DBRS’s concerns surrounding funding risk in the near term.

Potential triggers to a rating downgrade include material deterioration in asset quality or deterioration in funding ability.

The Australian banking industry in general remains in good shape, although the global credit market disruption and resulting global economic downturn are expected to continue to affect Westpac and its peers. The credit profiles of Westpac 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.

Westpac’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:
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.