DBRS Confirms Commonwealth Bank of Australia at AA, R-1 (high), Trends Stable

DBRS has today confirmed the ratings of the Commonwealth Bank of Australia (CBA or the Bank), including the Bank’s Deposits and Senior Debt at AA and Commercial Paper rating at R-1 (high). All trends are stable. The long-term rating incorporates the implied support of the Australian government, adding one notch to the intrinsic assessment (based on the floor rating approach; refer to Ratings Methodology on page 7).

The two primary risks to the Australian banking industry, including CBA, are its reliance on foreign wholesale funding and exposure to the domestic housing market. Any significant increase in either risk factor could have material impacts on CBA’s ratings, as they could limit the ability of the Bank to access funding and/or negatively affect the asset quality of the Bank. CBA has relied heavily on wholesale funding to support years of strong lending growth in excess of deposit growth. As a result, they have been forced to raise significant funding (primarily term) in the international wholesale debt markets, which DBRS views as a more volatile and expensive source of funds. Although weakening loan growth will likely allow CBA to fund the majority of new loans through deposits, wholesale funding is expected to remain a significant part of the total funding mix.

Australia’s housing market has shown signs of weakness after reaching peak housing prices in 2010. As housing loan growth – the Bank’s primary earnings driver – is expected to slow, the Bank’s earnings could be squeezed. However, assuming unemployment rates remain relatively low, DBRS does not expect the CBA’s loan loss ratios to deteriorate materially, acknowledging that the its overall asset quality remains at an acceptable level for this point in the credit cycle and is strong relative to global peers.

Overall, CBA has maintained strong asset quality ratios and a strong financial risk profile. The high quality of the Bank’s capital and its favourable liquidity metrics position CBA to meet Basel III requirements. The credit profiles of CBA 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).

Notes:
The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessment, which can be found on the DBRS website under Methodologies.