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

DBRS Ratings Limited (DBRS) has today confirmed the ratings of Commonwealth Bank of Australia (CBA or the Bank) including the AA Deposits and Senior Debt rating and the R-1 (high) Commercial Paper rating. The Trend on all ratings is Stable. CBA’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 CBA to the financial system in Australia, and the generally supportive regulatory framework.

The confirmation reflects the Bank’s strong Australian and New Zealand franchises, predictable earnings streams, solid capital levels and adequate liquidity, as well as the conservative risk profile. The Stable trend reflects these credit strengths as well as the consistent strategy. The ratings are unlikely to see upward pressure in the medium term, given their already high level, and the Bank’s reliance on wholesale funding. Therefore any upward pressure would require a substantial reduction in the level of wholesale funding, whilst maintaining low levels of credit losses, solid and predictable earnings and continued sound capital management. Downward pressure on the ratings would be likely if the proportion of wholesale funding, especially short-term wholesale funding, were to increase, or if the Bank’s asset quality were to deteriorate substantially.

CBA’s sizeable and well balanced franchise across Australia and New Zealand is a key strength underpinning the ratings, which are at the top-end of DBRS’s global bank rating universe. Potential growth outside of Australia is likely to be in areas where the Bank believes it has a competitive advantage, and as a result, DBRS would not expect any major mergers or acquisitions.

CBA’s consistency in generating strong profitability metrics supports the overall high rating. In 2015, CBA reported income before provisions and taxes (IBPT) of AUD 13.6 billion, up 5% year-on-year (YoY). This is driven primarily by the strong domestic franchise, with Australia accounting for 83% of income, and New Zealand the bulk of the remainder. Given the reliance on the Bank’s home market, DBRS views positively that CBA’s income sources are diversified across several business lines, all of which were profitable in 2015. It does, however, still leave the Bank vulnerable to a downturn in the Australian economy.

DBRS views CBA’s risk profile as conservative. The Bank’s loan book shows good levels of industry diversification, and credit quality remains extremely strong. At end-June 2015, total impaired loans as a percentage of gross loans falling further to 0.42% at end-June 2015 (FY14: 0.53%) and the coverage of impaired loans increasing to 134% (FY14: 122%). Even with loans 90+ days past due but not impaired included, the Bank’s problem loans as a percentage of gross loans remains very low at 0.78%.

CBA’s funding position has improved substantially in recent years as customer deposits have grown considerably faster than lending. As a result, the Bank’s (DBRS calculated) net loan to deposit ratio has improved from 157% in 2010 to 134% in 2015. DBRS does, however, note that the Bank maintains a high reliance on wholesale funding with AUD 280.5 billion of debt issued at end-June 2015. Although DBRS views negatively the level of wholesale funding, given the high rating level, it is mitigated to a certain degree by the Bank’s improving liquidity position, with Basel III Liquidity Coverage Ratio (LCR) eligible assets of AUD 132 billion at end-June 2015, including AUD 66 billion from the Committed Liquidity Facility (CLF). At end-June 2015, CBA’s net cash outflows, based on the Basel 3 LCR 30-day stress scenario, of AUD 110 billion, were covered 1.2 times by the liquidity portfolio, resulting in an LCR of 120%.

DBRS views CBA as having solid capitalisation and a strong capital generation capability. At end-September 2015, the Bank reported an Australia Prudential Regulation Authority (APRA) Basel III Common Equity Tier 1 (CET1) ratio of 9.8%, up 70 bps from end-June 2015, following strong earnings generation and the proceeds of the Bank’s AUD 5 billion fully-underwritten equity raise. 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, CBA also reported an APRA leverage ratio of 4.7%, and an internationally comparable leverage ratio of 5.3%. 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: January 24, 2005
Most Recent Rating Update: March 26, 2015

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