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

DBRS Ratings Limited (DBRS) has confirmed the ratings of Australia and New Zealand Bank Group Limited (ANZ or the Group), including the AA Long-Term Issuer Rating and Long-Term Senior Debt. 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 one notch of uplift to the final rating from the IA. The Support Assessment of SA2 reflects the systemic importance of ANZ to the financial system in Australia, and the generally supportive regulatory framework.

The confirmation of the ratings reflect the Group’s strong franchise in Australia and New Zealand as well as the strong revenue generation ability, the low risk profile, the sound capitalisation and the well-managed funding profile, despite the reliance on wholesale funding.

ANZ’s strong retail and business banking positions in Australia and New Zealand, which is complemented by a solid institutional banking business in select international locations, is a key factor underpinning the high IA. Following the strategic review of operations in FY16 and the decision to simplify its international activities, reduce operating costs and risks as well as remove product and management complexity, ANZ has over the last 15 months proceeded with the divestment of non-core assets and minority interests, primarily in Asia. DBRS views the re-focusing of the strategy towards its core businesses, along with a reduction in operating costs and complexity, as likely to lead to a better balanced, better capitalised and more efficient bank.

In recent years ANZ has consistently generated strong revenues supported by its strong positions in its core markets of Australia and New Zealand. Statutory profit before tax in FY17 totalled AUD 9.6 billion, up 18% on FY16. This primarily reflected reduced personnel expenses and the normalisation of technology expenses (following a charge of AUD 556 million related to an amended software capitalisation policy in FY16), as well as reduced levels of credit impairment charges, due to lower levels of both new entries and provision write-backs.

DBRS considers ANZ’s credit performance as solid, given the good quality loan book, the diversification by industry sector and the low cost of risk. Credit quality improved, primarily driven by a 56% reduction in Institutional impairment charges, while gross impaired loans plus loans over 90+ days past due (DPD) accounted for 0.91% of the total loan portfolio at end-FY17, down from 1.01% at end-FY16. The coverage ratio remains strong at 159% of gross impaired loans, or 71% including the loans over 90+ DPD.

DBRS also notes that the Group’s management of exposures towards more volatile sectors and geographies, such as natural resources, construction and China seem to be well-managed. The performance of the resources portfolio improved significantly with non-performing exposures down 63% yoy to AUD 170 million at end-FY17, while industry exposure stood at AUD 14 billion, representing 1.5% of total EAD as of the same date, with exposures being managed downwards. Slight deterioration is noted in the performance of the construction portfolio with a non-performing exposure of AUD 290 million at end-FY17, up 14% on end-FY16; however, it remains low at 1.4% of the Group’s total EAD. At end–FY17, Chinese EAD totalled approximately AUD 21 billion, with 62% of it concentrated in China’s central bank and its top 5 financial institutions, while 90% of the exposure had a tenor maturing in less than a year. DBRS notes that in October 2017 ANZ and the Australian Securities and Investment Commission (ASIC) reached an agreement over bank trading and the Bank Bill Swap Rate; as part of the resolution, ANZ has agreed to pay a penalty of AUD 50 million.

ANZ’s funding profile has improved significantly in recent years, as strong growth in customer deposits has helped reduce the (DBRS calculated) net loan-to-deposit ratio to 124% at end-FY17from 131% at end-FY13. The Group, however, similar to its major Australian peers, continues to rely on wholesale funding, which accounts for 31.4% of total funding at end-FY17. DBRS views that this is partially mitigated by the improving liquidity position, with average liquid assets of AUD 180.5 billion in FY17, including High Quality Liquid Assets (HQLA) of AUD 132.3 billion, which compares to short-term funding of AUD 127 billion at end-FY17. DBRS notes that the Group reported an average LCR of 135% in 2017, up from 126% in 2016.The Group’s Net Stable Funding Ratio (NSFR) stood at 114% at end-FY17, which is above the minimum 100% requirement to be introduced as of January 1, 2018.

DBRS considers ANZ’s capital position as robust with an APRA Basel III Common Equity Tier 1 (CET1) ratio of 10.6% at end-FY17, up 1% on end-FY16, with the increase reflecting organic capital generation and a reduction in institutional credit risk-weighted assets. The Group is currently above APRA’s ‘unquestionably strong’ benchmark CET1 ratio of 10.5% that is expected to be met by January 1, 2020. ANZ’s leverage ratio, calculated on an APRA basis as Tier 1 Capital % of Total Exposure was 5.4% at end-FY17, up from 5.3% at end-FY16. DBRS notes that the announced asset sales are expected to have a further positive impact of approx. 80 bps on the Group’s CET1 ratio. On an internationally comparable basis, ANZ reported a higher CET1 ratio of 15.8% and a higher leverage ratio of 6.2%.

RATING DRIVERS
Any upward pressure would require a reduction in the extent of the reliance on 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.

The Grid Summary Grades for ANZ are as follows: Franchise Strength – Very Strong/Strong; Earnings Power – Very Strong/Strong; Risk Profile – Very Strong/Strong; Funding & Liquidity – Strong/Good; Capitalisation – Very Strong.

Notes:
All figures are in AUD unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (May 2017). This can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include SNL Financial, company reports, the Reserve Bank of Australia, the Australian Prudential Regulation Authority and the Reserve Bank of New Zealand. 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:
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Ratings assigned by DBRS Ratings Limited are subject to EU and US 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: January 25, 2005
Last Rating Date: July 14, 2017

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