DBRS Confirms Westpac at AA / R-1 (high); Trend Stable

DBRS Ratings Limited (DBRS) has today confirmed Westpac Banking Corporation (Westpac or the Bank) including the Bank’s AA Deposits and Senior Debt ratings and the R-1 (high) Commercial Paper rating. The trend on all ratings is Stable. Westpac’s ratings reflect an intrinsic assessment (IA) of AA (low), combined with a support assessment of SA2, which results in a one notch uplift to the final rating from the IA. The SA2 reflects the systemic importance of Westpac to the financial system in Australia, and the generally supportive regulatory framework.

The ratings, which are at the top-end of DBRS’s global bank rating universe, are underpinned by the Bank’s strong franchise, including market-leading positions in Australian retail banking, solid earnings generation, relatively low risk profile, strong capital levels and adequate liquidity position. The Stable trend reflects the Bank’s strong credit profile. In addition DBRS does not expect that the recent change in CEO will lead to any major strategy changes. The ratings are unlikely to experience upward pressure in the medium term, given their already high level, and the Bank’s reliance on wholesale funding. As a result, any upward pressure would require a significant reduction in the level of wholesale funding, while maintaining low levels of credit losses, solid and predictable underlying profitability, and continued sound capital management. Negative rating pressure would likely be driven by a weakening of the Bank’s funding and liquidity profile, with, for example, an increased dependence on short-term wholesale funding, or a substantial deterioration in asset quality measures.

In confirming the ratings, DBRS recognises Westpac’s strong domestic franchise across Australia and New Zealand. Westpac also continues to generate consistently strong profitability metrics, benefitting both from the relatively stable operating conditions in its core markets, Australia and New Zealand, and from its risk discipline, which has led to strong credit performance. The earnings profile underpins the current high ratings. In 2015, Westpac reported income before provisions and taxes (IBPT) of AUD 12.2 billion, an increase of 7% year-on-year (YoY), and net profit of AUD 8.0 billion, a 6% YoY increase.

Westpac maintains a conservative risk culture that has historically led to low loan losses. As a result, the Bank’s overall asset quality remains extremely good with impaired loans and impairment charges remaining at very low levels. Westpac’s overall sound credit quality benefits from the excellent performance of its large residential mortgage portfolio. The Bank’s corporate lending is also relatively conservative, with the top 10 exposures accounting for only 1.2% of total committed exposure (TCE) at end-September 2015, and an impaired assets ratio, including loans 90+ days past due but well secured, of 1.19%.

DBRS considers Westpac’s funding position as adequate given the high rating level. Although the Bank benefits from a diversified funding mix, and has reduced its use of offshore wholesale funding in recent years, the dependence on wholesale funding remains significant, as evidenced by a DBRS calculated net loan-to-deposit (LTD) ratio of 146% at end-September 2015. In addition, the Bank’s use of short-term funding remains high, at AUD 116.6 billion at end-September 2015. Although DBRS views negatively the level of wholesale funding, it is partially mitigated by the Bank’s unencumbered liquidity portfolio, which at end-September 2015 totalled AUD 135.6 billion. At end-September 2015, the Bank’s Liquidity Coverage Ratio (LCR) was 121%, up from 114% at end-March 2015. Westpac’s LCR consists of AUD 61 billion of High Quality Liquid Assets (HQLA) and AUD 66 billion Committed Liquidity Facility (CLF), which was established by the Reserve Bank of Australia (RBA) jointly with Australian Prudential Regulation Authority (APRA), in order to mitigate the limited amount of Australian Dollar high quality liquid assets (HQLA).

Westpac has a strong capital position, with an APRA Basel III Common Equity Tier 1 (CET1) ratio of 9.5% at end-September 2015, up 53 basis points YoY. In October 2015, Westpac announced that it was to raise AUD 3.5 billion of capital through an Entitlement Offer. On a pro-forma basis, including the planned capital raise, and taking into account the implementation of the APRA changes to the calculation of risk-weighted assets for Australian mortgage portfolios, which results in the average credit risk weights in its Australian mortgage portfolios increasing to 25% from approximately 16%, and takes effect from July 1, 2016, Westpac estimates that its APRA Basel III CET1 ratio would be 9.4%. DBRS notes that this remains above the Bank’s internal CET1 target of 8.75-9.25%, and APRA’s additional capital buffer requirements for D-SIBs, which results in a minimum CET1 ratio of 8.0% by January 1, 2016. At end-September 2015, Westpac also reported an APRA leverage ratio of 4.8%, and an internationally comparable leverage ratio of 5.5%. DBRS notes that APRA is yet to set a minimum leverage ratio requirement.

Notes:
All figures are in AUD unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2015). Other methodologies used include the DBRS Criteria: Support Assessment 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.

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

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.

Lead Analyst: Ross Abercromby
Rating Committee Chair: Roger Lister
Initial Rating Date: February 1, 2005
Most Recent Rating Update: March 26, 2015

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