DBRS Releases Report on National Australia Bank Limited

DBRS has today released an updated report on National Australian Bank Limited (NAB or the Bank). NAB’s credit quality of has remained very strong due to the Bank’s (1) strong domestic retail banking franchise, (2) reasonable asset quality in the loan book, (3) modest geographic diversification 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).

The two primary risks for the Australian banking industry, including NAB, are its reliance on foreign wholesale funding and exposure to the domestic housing market. Any significant increase in either risk factor could have an impact on NAB’s ratings as they could limit the Bank’s access to funding and/or negatively affect the asset quality of the Bank. Similar to peers, NAB has relied heavily on wholesale funding to support years of strong lending growth in excess of deposit growth. They have primarily raised term funding in the international wholesale debt markets, which DBRS views as a more volatile and expensive source of funds. However, as Basel III approaches, NAB has been focused on stable funding, which includes deposit taking and extending the duration of the wholesale funding portfolio.

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

Exposure to higher-risk specialized group assets has continued to decrease as a result of run-off and the removal of the economic risk of the remaining two synthetic collateralized debt obligations held as part of the portfolio. Overall, NAB has maintained strong asset quality ratios and a strong financial risk profile. The high quality of capital and the favourable liquidity metrics of the Bank position NAB to meet Basel III requirements.

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.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.