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

DBRS Ratings Limited (DBRS) has today confirmed the ratings of Westpac Banking Corporation (Westpac or the Bank) including the AA Deposits and Senior Debt ratings. 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 confirmation of the ratings reflect the Bank’s extremely strong domestic franchise, along with its strong position in New Zealand. The ratings also incorporate the Bank’s consistent earnings stream, conservative risk profile, solid capital levels, and adequate liquidity profile.

Westpac’s consistency in generating strong profitability metrics supports the overall high rating. In FY16, Westpac reported net profit, on a cash earnings basis, of AUD 7.8 billion as a result of solid income growth. The performance of the Bank’s Consumer Bank division was a particular highlight in the year, reporting a 9% increase in revenues, to AUD 8 billion, with higher rates on investor property lending and mortgage repricing contributing to net interest income growth. Given the Bank’s reliance on home markets though, DBRS views positively the diversification of income sources across business lines, all of which were profitable in FY16. In addition to strong revenue generation, the Bank continues to demonstrate strong cost control, with an efficiency ratio of 42.0%, on a cash basis, in FY16, despite significant levels of ongoing investment in the business, with a 20% year-on-year (YoY) increase in investment spend to AUD 1.2 billion in FY16.

DBRS views Westpac’s risk profile as conservative. The Bank’s loan book shows good levels of industry diversification, and credit quality remains extremely strong, with an impaired loan ratio of only 0.32% at end-FY16, and a coverage ratio of 154%. Even with loans 90+ days past due (DPD) but not impaired included, the Bank’s problem loans as a percentage of gross loans remains very low at 0.80%.

The Bank’s exposure to sectors that are currently more vulnerable to increased stress, such as New Zealand dairy and mining, also appears well managed. At end-FY16, only 0.34% of the Bank’s New Zealand dairy exposure, which totalled NZD 5.9 billion, equivalent to only 0.58% of the Bank’s total committed exposure (TCE), was classified as impaired, whilst Westpac’s mining exposure also continues to perform well, with impaired exposures accounting for only 1.32% of the Bank’s AUD 6.2 billion lending exposure. The performance of Westpac’s commercial property portfolio, and specifically lending to inner city residential apartment developments, also appears to be relatively conservative, with developments of greater than AUD 20 million in major markets (inner Melbourne, Brisbane, Perth metro area, Sydney major markets) accounting for only 4.8% of the Bank’s commercial property TCE, and an average dynamic loan-to-value ratio (LVR) of 54% for the overall AUD 13 billion loan book.

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 142% at end-FY16. In addition, the Bank’s use of short-term funding, including long term debt with a residual maturity of less than one year, remains high, at AUD 116.1 billion at end-FY16. Although DBRS views negatively the level of wholesale funding, it is partially mitigated by the Bank’s unencumbered liquidity portfolio, which at end-FY16 totalled AUD 144.3 billion. At end-FY16, the Bank also reported a Liquidity Coverage Ratio (LCR) of 134%, up from 127% at end-1H16.

DBRS views Westpac’s capital position as strong, with the Bank reporting an APRA Basel 3 Common Equity Tier 1 (CET1) ratio of 9.5% at end-FY16, unchanged YoY, as risk-weighted assets (RWA) inflation related to the implementation of APRA’s changes to the calculation of Australian residential mortgages RWAs was offset by the AUD 3.5 billion capital raise in October 2015. As a result, the Bank continues to surpass APRA’s additional capital buffer requirements, which result in a minimum CET 1 ratio of 8% by January 1, 2016. The Bank’s leverage ratio, calculated on an APRA basis as Tier 1 capital % of Total Exposure, was 5.2% at end-FY16. On an internationally comparable basis, Westpac reported a CET1 ratio of 14.4%, and a leverage ratio of 5.9% at end-FY16.

Concurrently, DBRS has withdrawn its Commercial Paper rating on Westpac and assigned an R-1 (high) Short-Term Instruments rating to Westpac, which reflects DBRS’s view of the Bank’s short-term debt and deposit liabilities (i.e. maturing within 1 year).

RATING DRIVERS
Upward pressure on the rating is unlikely in the medium term given the already high rating level, and the Bank’s reliance on wholesale funding. 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

Notes:
All figures are in AUD unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (July 2016). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2016) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016). 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, the Reserve Bank of Australia, the Australian Prudential Regulation Authority, Reserve Bank of New Zealand and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

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

This rating included participation by the rated entity or any related third party. DBRS had no access to relevant internal documents for the rated entity or a related third party.

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 historical default rates published by the European Securities and Markets Authority (“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, Senior Vice President - Global FIG
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer - Global FIG and Sovereign Ratings
Initial Rating Date: February 1, 2005
Most Recent Rating Update: December 17, 2015

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