DBRS Releases Report on Australia and New Zealand Banking Group Limited

DBRS has today released an updated report on Australia and New Zealand Banking Group Limited (ANZ or the Bank). The credit quality of ANZ has remained very strong due to the Bank’s (1) strong domestic retail banking franchise, (2) super-regional expansion strategy, (3) strong financial risk profile and (4) supportive regulatory environment. 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 many years of strong domestic loan growth and structural factors, including superannuation contributions that are largely invested in equity markets. With slowing loan volume growth, ANZ should be able to reduce the risks related to this issue by funding the majority of new loans through deposits, as well as further extending the duration of its offshore wholesale funding portfolio and liquidity.

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

ANZ’s concentration in the domestic market is expected to be increasingly mitigated by its strategy to create a leading super-regional bank, expanding from its core base Australia and New Zealand to include a higher proportion of earnings from the faster-growing Asia-Pacific region (25% to 30% of profit by 2017). DBRS notes that the deposit-rich Asia-Pacific region has begun to provide additional benefits in the form of funding for ANZ. More recently, DBRS-adjusted earnings in the fiscal year ended September 30, 2012 (FY 2012), increased to $5.8 billion from $5.6 billion in FY 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.