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

DBRS Ratings Limited (DBRS Morningstar) confirmed the ratings of Australia and New Zealand Bank Group Limited (ANZ or the Group), including the Long-Term Issuer Rating and the Long-Term Senior Debt rating at AA. The Short-Term Issuer Rating was confirmed at R-1 (high). The trend on all ratings is Stable. The Intrinsic Assessment (IA) of the Group is AA (low) and the Support Assessment is SA2, which results in a one notch uplift to the final rating from the IA. The Support Assessment of SA2 reflects the generally supportive regulatory framework and DBRS Morningstar’s expectation of a timely systemic support, given ANZ’s importance to the financial system in Australia. A full list of rating actions is included at the end of this press release.

KEY RATING CONSIDERATIONS

The confirmation of the ratings reflects the Group’s very strong franchise in Australia and New Zealand, and its strong credit risk profile, as well as the fact that the Group’s sound capitalisation, along with the strong revenue generation ability, should enable the Group to meet increasing capital requirements.

The ratings also incorporate the Group’s progress in addressing risk management issues, as well as a well-managed funding and liquidity profile, despite a higher reliance on wholesale funding than most similarly rated international peers.

RATING DRIVERS

Upward rating pressure on the IA would require the Group to (i) continue to address outstanding regulatory issues, and (ii) become less reliant on wholesale funding, while (iii) maintaining very strong earnings and sound capital management.

Negative pressure on the IA would arise (i) if the Group had significantly larger than already identified operational risk issues given DBRS Morningstar’s limited tolerance of control issues at high rating levels, or (ii) if the proportion of wholesale funding were to increase significantly.

Furthermore, negative pressure on the long-term ratings would arise (i) if DBRS Morningstar were to change the Support Assessment to SA3, in case DBRS Morningstar’s expectation for timely systemic support were to reduce, or (ii) if the rating of Commonwealth of Australia was downgraded to the same level or lower than the Group’s IA.

RATING RATIONALE

Australia and New Zealand Banking Group Limited (ANZ) is a leading Australian bank with a strong franchise in its core markets of Australia and New Zealand, both in retail and business banking. Over the last years, the Group has rebalanced its institutional portfolio and refocused its activities towards core businesses, while the Group’s international operations were simplified through the disposal of non-core assets and minority stakes. DBRS Morningstar considers that ANZ’s re-focusing of the strategy towards businesses they are strong at, combined with active management of the expense base and reduced complexity, should be supportive of management’s target to make ANZ a better balanced 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, albeit lower in FY19, while efficiency levels remain very good. The Group reported statutory net profit attributable to shareholders of AUD 5,953 million, down 7% compared to FY18, as total operating income decreased by 6%. This was mainly driven by a lower net interest margin, largely due to lower interest rates and competitive pressure. Impairment charges increased by 15% outweighing a 4% decrease in operating expenses. Nevertheless, the Group’s cost-to-income ratio from continuing operations improved to 47.7% in FY19 from 48.5% in FY18 mainly due to the absence of significant one-off expenses (such as the accelerated software amortisation charge reported in FY18), lower restructuring expenses, lower legal costs related to misconduct issues, and lower full-time employees. The Group’s ROE was just above 10%.

ANZ’s credit risk performance is solid. The loan book consists predominantly of mortgages while the level of impaired loans is low and the exposure towards more pressured sectors and geographies appears well-managed. In the context of a still good Australian macroeconomic environment with a low unemployment rate, credit quality remains very strong with a gross impaired assets ratio, which includes gross impaired loans, restructured items and non-performing commitments along with loans over 90+ days past due, of 0.93% in FY19 albeit up from 0.84% in FY18.

DBRS Morningstar considers that addressing non-financial risks such as operational risk issues uncovered by the Royal Commission is an important challenge for ANZ, along with its peers. Currently, the Group is in the process of actioning recommendations by the industry-wide Royal Commission and by APRA, following the conclusion of ANZ’s Culture, Governance and Accountability (CGA)’s self-assessment, and is reporting some progress on both fronts. However, DBRS Morningstar is expecting full implementation of the recommendations laid out by the Royal Commission and APRA will take time, in part because of the number of recommendations and given legislative changes can be required.

DBRS Morningstar views ANZ’s funding profile to have improved in recent years as growth in customer deposits has outpaced the moderate loan growth. As such, the Group’s net loan-to deposit ratio improved to 120% at end-FY19. Customer deposits totalled AUD 511.8 billion at end-FY19, providing a solid foundation to the Group’s funding profile. However, similar to its major Australian peers, the Group has higher reliance on wholesale funding than most of its global peers. DBRS Morningstar views, however, that the Group has a relatively good diversification in its wholesale funding profile in terms of product and currency. In addition, the Group has a solid liquidity position with a Liquidity Coverage Ratio of 140% at end-FY19 (138% at end-FY18). The Group’s Net Stable Funding Ratio was 116% (115% end-FY18).

DBRS Morningstar views ANZ as having a robust capital position, as well as being well-placed to address the evolving capital framework in Australia and New Zealand given the Group’s solid track record in generating earnings, and its flexibility in accessing markets. The Group reported an APRA Common Equity Tier 1 (CET1) ratio of 11.4% at end-FY19, flat on end-FY18, as organic capital generation and the positive impact of divestments was offset by the dividend paid, elevated customer remediation costs, increased risk-weighted assets, and a capital add-on of AUD 500 million that APRA imposed on ANZ in July 2019 as a result of identified weaknesses in managing non-financial risk. DBRS Morningstar notes that, while above APRA’s benchmark of 10.5% that is set for January 1, 2020, the implementation of the Capital Review proposals by the Reserve Bank of New Zealand and APRA’s recommended revisions on the capital framework on equity investments in subsidiaries could potentially reduce the currently large cushions, absent mitigating actions. On an internationally comparable basis, ANZ reported a solid CET1 ratio of 16.4% (albeit down from 16.8% at end-FY18) and a leverage ratio of 6.2% (6.1% at end-FY18) according to the Group’s calculations.

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

Notes:
All figures are in AUD unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2019). This 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, the Reserve Bank of New Zealand and S&P Global Market Intelligence. DBRS Morningstar 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 Morningstar had no access to relevant internal documents for the rated entity or a related third party.

DBRS Morningstar 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 Morningstar's outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar 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: Vitaline Yeterian, Vice President - Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of European FIG - Global FIG
Initial Rating Date: January 25, 2005
Last Rating Date: November 30, 2018

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