DBRS Confirms Commonwealth Bank of Australia at AA and R-1 (high), Stable

DBRS has today confirmed the ratings of Commonwealth Bank of Australia (CBA 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 supported by CBA’s (1) strong domestic retail banking franchise, (2) strong revenue diversity relative to domestic peers, (3) conservative credit management, 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).

Australia’s banking industry has remained favourable due to the conservative and supportive regulatory environment put in place by the Reserve Bank of Australia and the Australian Prudential Regulation Authority (APRA). However, CBA’s limited geographic diversification continues to expose the Bank to potential regional economic volatility and the domestic housing market which has shown signs of weakness after reaching peak housing prices in 2010.

In addition to the Bank’s domestic housing market exposure, CBA, and its peers, have continued to rely on offshore wholesale funding due to years of strong loan growth in excess of deposit growth. DBRS views offshore wholesale funding as a more volatile and expensive source of funding. Although CBA is curtailing its wholesale funding exposure by generating deposit growth, wholesale funding is expected to remain a significant part of the total funding mix.

Overall, CBA has maintained strong asset quality ratios and a strong financial risk profile in the half-year ended December 31, 2012 (H1 2013) despite increasing competitive pressure and concern related to the softening housing market. The Bank’s APRA Basel III Common Equity Tier 1 ratio and non-performing loans / loans and bankers’ acceptances remained reasonable at 8.1% and 1.3%, respectively. Furthermore, DBRS-adjusted earnings in H1 2013 remained relatively stable.
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 the Global Methodology for Rating Banks and Banking Organisations (June 2012) and DBRS Criteria: Intrinsic and Support Assessments (February 2009), which can be found on the DBRS website under methodologies.