DBRS Downgrades Subordinated Debt of Major Australian Banks to A (high)

DBRS Ratings Limited (DBRS) has today downgraded the subordinated debt of Australia & New Zealand Banking Group Limited (ANZ), Commonwealth Bank of Australia (CBA), National Australia Bank Limited (NAB) and Westpac Banking Corporation (Westpac) by 1 notch to A (high), from AA (low). The trend on the subordinated debt of the four banks is now Stable. This rating action concludes the review initiated on December 11, 2014 and reflects DBRS’s view that the probability of subordinated debt being treated adversely in a stress scenario has increased.

Whilst DBRS acknowledges that the Australian authorities are yet to endorse bail-in and burden sharing policies for senior debt, the regulator already has some powers to transfer assets, which, in certain circumstances, could be used to achieve a similar economic effect to a bail-in. DBRS also notes that the final report of the Australian Financial System Inquiry (FSI), published in December 2014, recommends the introduction of a bail-in framework. As a result of these developments DBRS views that the probability of subordinated debt being treated adversely in a stress scenario has increased, and consequently DBRS now notches subordinated debt in Australia from the individual bank’s Intrinsic Assessment (IA), rather than from the senior debt rating, which may incorporate systemic support.

As explained in DBRS's criteria "Rating Bank Capital Securities - Subordinated, Hybrid, Preferred & Contingent Capital Securities" (February 2015), where governments are disposed towards imposing losses on subordinated debt and hybrid holders at a bank under stress, DBRS's approach is to notch from the bank's Intrinsic Assessment (IA). DBRS now rates subordinated debt in Australia one notch (for mandatory pay or discretionary pay but cumulative instruments) below the IA. As DBRS has typically incorporated up to one notch of systemic support into the senior unsecured debt ratings of the affected banks, the change to notching from the IA instead of from the senior unsecured debt rating, has led to a lowering of the subordinated debt rating.

As a result of the change to notching from the IA the subordinated debt ratings are now likely to move in line with the IA of the individual banks.

Notes:
All figures are in AUD unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2014). Other methodologies used include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2015) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015). These can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance.

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

This is an unsolicited rating. This credit rating was not initiated at the request of the issuer.

Australia and New Zealand Banking Group

Lead Analyst: Ross Abercromby
Rating Committee Chair: Alan G. Reid
Initial Rating Date: January 25, 2005
Most Recent Rating Update: December 11, 2014

This is an unsolicited rating. This credit rating was not initiated at the request of the issuer.

Commonwealth Bank of Australia

Lead Analyst: Ross Abercromby
Rating Committee Chair: Alan G. Reid
Initial Rating Date: January 24, 2005
Most Recent Rating Update: December 11, 2014

This is an unsolicited rating. This credit rating was not initiated at the request of the issuer.

National Australia Bank Limited

Lead Analyst: Ross Abercromby
Rating Committee Chair: Alan G. Reid
Initial Rating Date: January 24, 2005
Most Recent Rating Update: December 11, 2014

This is an unsolicited rating. This credit rating was not initiated at the request of the issuer.

Westpac Banking Corporation

Lead Analyst: Ross Abercromby
Rating Committee Chair: Alan G. Reid
Initial Rating Date: February 1, 2005
Most Recent Rating Update: December 11, 2014

DBRS Ratings Limited
1 Minster Court, 10th Floor
Mincing Lane
London
EC3R 7AA
United Kingdom
Registered in England and Wales: No. 7139960

For additional information on this rating, please refer to the linking document located at: http://www.dbrs.com/research/236983/banks-and-banking-organisations-linking-document.pdf

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.