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

DBRS Ratings Limited (DBRS) has today confirmed Australia & New Zealand Banking Group Limited (ANZ or the Group) including the Group’s AA Issuer & Deposits and Senior Debt ratings and the R-1 (high) Commercial Paper rating. The trend on all ratings is Stable. ANZ’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 ANZ to the financial system in Australia, and the generally supportive regulatory framework. Concurrently, DBRS has also withdrawn the ratings on the Long Term Debt Guaranteed by the Australian Government, as the debt has been repaid.

The ratings, which are at the top-end of DBRS’s global bank rating universe, are underpinned by the Group’s strong franchise in Australia, and a market-leading position in New Zealand retail and commercial banking, predictable earnings generation, relatively low risk profile, strong capital levels and adequate liquidity position. The Stable trend reflects these credit strengths as well as DBRS’s expectation that the change in CEO will not lead to any substantial changes in strategy. The ratings are unlikely to see upward pressure in the medium term, given their already high level, and the reliance on wholesale funding. Therefore any upward pressure would require a substantial 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 Group’s funding and liquidity profile, with, for example, an increased dependence on short-term wholesale funding, or a substantial deterioration in asset quality measures, potentially as a result of the Group’s meaningful exposure in Asia-Pacific.

In confirming the ratings, DBRS recognises ANZ’s strong domestic franchise across Australia and New Zealand, which DBRS views as a key factor in the ratings. ANZ’s strong position in its core markets is supplemented by the Group’s ‘super-regional’ banking strategy, which has led to a growing presence in Asia-Pacific, focused on supporting Australian and New Zealand customers operating, trading and transacting in the region, along with Asian high-net worth individuals. Following several years of aggressive expansion, ANZ is now looking to consolidate its Asia-Pacific platform, with increased focus on deepening current client relationships and on establishing greater returns from its footprint. Despite the move away from expansion, DBRS will continue the monitor the Group’s Asia-Pacific franchise and see whether returns are commensurate with the risks being taken.

ANZ’s consistency in achieving strong profitability metrics underpins its high ratings. The Group has continued to report improves levels of profitability, benefitting not only from the relatively stable operating conditions in its core markets, Australia and New Zealand, but also from its expansion into Asia-Pacific and from its risk discipline, which has led to strong credit performance, and low impairment charges. In 2015, ANZ reported income before provisions and taxes (IBPT) of AUD 11.7 billion, an increase of 4% year-on-year (YoY), and net profit of AUD 7.5 billion, a 3% YoY increase.

DBRS views ANZ’s risk profile as relatively low, given its focus on retail and business banking, which includes AUD 231.2 billion of residential mortgages in Australia. DBRS notes, however, that ANZ’s lending has shown significant growth in recent years, most notably in Asia-Pacific, Europe & America. Whilst credit quality remains extremely good across the entire book, with an overall impaired loan ratio, including loans 90+ days past due, but not impaired, of 0.89%, ANZ’s lending growth, especially in Asia-Pacific may leave the Group vulnerable to a slowdown in the local economies.

DBRS considers ANZ’s funding position as adequate. Although the Group benefits from a diversified funding mix, the dependence on wholesale funding is significant, as evidenced by a DBRS calculated net loan-to-deposit (LTD) ratio of 128% at end-September 2015. In addition, the Group’s use of short-term funding remains high. Although DBRS views negatively the level of wholesale funding, given the high rating level, it is mitigated to a certain degree by the size of the Group’s liquidity portfolio, which at end-September 2015 totalled AUD 185 billion (up 23% YoY), including AUD 54 billion from the Committed Liquidity facility (CLF). At end-September 2015, the Group’s net cash outflows, based on the Basel III Liquidity Coverage Ratio (LCR) 30-day stress scenario, of AUD 151 billion, were covered 1.2 times by the liquidity portfolio, resulting in an LCR of 122%.

ANZ has a strong capital position, with an Australian Prudential Regulation Authority (APRA) Basel III Common Equity Tier 1 (CET1) ratio of 9.6% at end-September 2015. This is already in excess of APRA’s 8% minimum requirement by 1 January 2016, which comprises a minimum CET1 ratio of 4.5% (effective from 1 January 2013), and then an additional CET1 capital conservation buffer of 3.5%, inclusive of a Domestic Systemically Important Bank (DSIB) requirement of 1%. At end-September 2015, ANZ also reported an APRA leverage ratio of 5.1%, and an internationally comparable leverage ratio of 5.65%. 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, APRA 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: January 25, 2005
Most Recent Rating Update: March 26, 2015

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

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