DBRS Updates Its Report on Westpac Banking Corporation

DBRS has today updated its report on Westpac Banking Corporation (Westpac or the Bank). The credit quality of Westpac remains very strong due to the Bank’s (1) strong domestic retail banking franchise; (2) business line diversification; (3) resilient asset quality; 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 long-standing 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 softened 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 (RBA) and the Australian Prudential Regulatory Authority (APRA). The Bank’s earnings remained comparatively resilient throughout the downturn. More recently, DBRS-adjusted earnings in the fiscal year ended September 30, 2012 (F2012), increased to $6.7 billion from $6.0 billion in the fiscal year ended September 30, 2011 (F2011), as operating performance remained strong.

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

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