DBRS Confirms National Australia Bank Limited at AA and R-1 (high), Stable

DBRS has today confirmed the ratings of the National Australia Bank Limited (NAB 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 confirmation is underpinned by NAB’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.

Australia is viewed as a good environment for banking, due to the conservative and supportive regulatory environment put in place by the Reserve Bank of Australia (RBA) and the Australian Prudential Regulation Authority (APRA). NAB continues to have a strong domestic retail banking franchise, maintaining its leading market share in business banking. However, NAB’s asset quality remains hindered by its U.K. commercial real estate segment, as the economic environment remained weak in the U.K. Despite the underperforming U.K. assets, the Bank’s overall asset quality remained reasonable due to its significant market position in the low-risk domestic mortgage market. Going forward, DBRS does not expect NAB’s loan loss ratios to deteriorate materially, despite a softer Australian housing market since 2010 and slower expected housing loan growth.

The Bank, similar to its peers, has relied heavily on wholesale funding to support years of strong lending growth in excess of deposit growth. NAB has primarily raised term funding in the international wholesale debt markets, which DBRS views as a more volatile and expensive source of funds. However, the Bank has focused on increasing deposits and extending the duration of the wholesale funding portfolio to lower its volatility and cost of funding.

For the half-year ended March 31, 2013 (H1 2013), NAB has maintained a strong financial risk profile and reasonable asset quality, with an APRA Basel III Common Equity Tier 1 ratio of 8.2% and non-performing loans/loans and bankers’ acceptances at 1.7%. Furthermore, DBRS-adjusted earnings remained relatively stable in H1 2013.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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 the DBRS website under Methodologies.