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

DBRS has today confirmed the ratings of Westpac Banking Corporation (Westpac 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).

One key longstanding challenge for the Bank and its peers remains a dependence on offshore wholesale funding markets, driven by strong domestic loan growth for many years and structural factors, including superannuation contributions that are largely invested in equity markets. With decreased loan volume growth over the past two years, Westpac has reduced its reliance on offshore wholesale funding by increasing stable customer deposits. In addition, the bank has improved its funding maturity profile by issuing more long-term funding.

While Australia is expected to continue to be a good environment for banking, DBRS is cognizant that Westpac’s limited geographic diversification exposes the Bank to potential regional economic volatility, particularly to the housing market. Australia’s housing market has shown signs of weakness after reaching peak housing prices in 2010. As housing loan growth slows, the Bank’s earnings could be compressed (Westpac has not experienced this to date). However, DBRS does not expect Westpac’s loan loss ratios to deteriorate materially.

The credit profiles of Westpac and its peers benefit from being regulated by conservative and supportive regulatory organizations, including the Reserve Bank of Australia and the Australian Prudential Regulatory Authority. The Bank’s earnings remained comparatively resilient throughout the downturn. More recently, DBRS-adjusted earnings in H1 2012 increased modestly to $3.1 billion from $2.9 billion in H1 2011 as operating performance remained strong.

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

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations (June 2012) and the DBRS Criteria: Intrinsic and Support Assessments (February 2009), which can be found on our website under Methodologies.