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

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

The confirmation of the ratings reflects the strength of the Bank’s franchise in its core markets of Australia and New Zealand, along with the consistent revenue generation, the conservative risk profile, the robust capitalisation levels and the adequate funding and liquidity profile.

Westpac enjoys strong market shares in the retail and business banking markets in Australia, and this is complemented by a strong retail market position in New Zealand along with a select presence in America, Europe and the Asia Pacific region, where the Bank supports Australian customers operating in the region or assists international customers doing business in Australia and New Zealand.

The Bank has consistently generated strong profitability metrics and this earnings strength is a key factor in its high IA. In FY17, the Bank reported net profit on an underlying cash earnings basis of AUD 8.1 billion, up 3% on FY16, as a 1.5% increase in operating income supported by a 24% reduction in impairment charges more than offset a 2% increase in operating expenses. The Bank’s 42% cost-income ratio, on a cash basis, remains strong and DBRS notes that Westpac remains committed to achieving a cost-income ratio below 40% in the coming years.

Westpac’s risk profile remains low with retail lending accounting for 72% of the total loan. Gross impaired loans plus loans over 90+ days past due (DPD) accounted for 0.73% of the total loan portfolio at end-FY17, while the coverage ratio stood at 186% of gross impaired loans, or 57% including the loans over 90+ DPD. Exposures to more pressured sectors, such as mining and commercial property also seem to be well-managed with the mining exposure remaining low at 0.96% of the total committed exposure (TCE) and only 0.44% of the AUD 5.1 billion lending portfolio classified as stressed. Exposure to commercial property, in particular inner-city apartment developments, appears well-diversified with developments of over AUD 20 million in the major markets accounting for only AUD 2.7 billion, or 4.1% of the total commercial estate TCE, while exposure to consumer mortgage loans for inner city apartments totalled AUD 14.1 billion and had an average dynamic loan-to-value (LVR) ratio of only 53%, at end-FY17.

DBRS views Westpac’s funding profile as adequate. Despite the growth in customer deposits in recent years, reliance on wholesale funding remains significant with the Bank’s (DBRS calculated) net loan-to deposit ratio standing at 141% at end-FY17. This is partially mitigated by the Bank’s liquidity position as short-term funding, which includes funding with original maturity greater than 12 months that is now maturing in less than a year and accounts for 50% of the AUD 238.6 billion wholesale funding is covered 1.24x times by the AUD 137.8 billion unencumbered liquid assets portfolio Westpac reported a Liquidity Coverage Ratio (LCR) of 124% at end-FY17. Its estimated Net Stable Funding Ratio (NSFR) stood at 109% at end-FY17, which is above the minimum 100% requirement to be introduced as of January 1, 2018.

Westpac’s capital position is robust with a reported APRA Basel III Common Equity Tier 1 (CET1) ratio of 10.6% at end-FY17, up 1.1% on end-FY16, which primarily reflected organic capital generation, a reduction in risk-weighted assets and the sale of the stake in wealth manager BTIM. The Bank is already above APRA’s ‘unquestionably strong’ benchmark CET1 ratio of 10.5% that is expected to be met by January 1, 2020. Westpac’s leverage ratio, calculated on an APRA basis as Tier 1 Capital % of Total Exposure was 5.7% at end-FY17, up from 5.2% at end-FY16. On an internationally comparable basis, Westpac reported higher levels with a CET1 ratio of 16.2% and a leverage ratio of 6.3%.

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 Westpac are as follows: Franchise Strength – Very Strong/Strong; Earnings Power – Very 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:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

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: February 1, 2005
Last Rating Date: July 14, 2017

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