DBRS Morningstar Changes Trend on CBA’s AA LT Issuer Rating to Positive from Stable

DBRS Ratings Limited (DBRS Morningstar) confirmed the ratings of Commonwealth Bank of Australia (CBA or the Bank), including the Long-Term Issuer Rating at AA. The Short-Term Issuer Rating was confirmed at R-1 (high). The trend on the long-term ratings has been revised to Positive from Stable. The Intrinsic Assessment (IA) of the Bank is AA (low) and the Support Assessment is SA2, which reflects the generally supportive regulatory framework and DBRS Morningstar’s expectation of timely systemic support, given CBA’s importance to the financial system in Australia. This results in a one notch uplift to the Issuer Rating from the IA. See a full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS
The confirmation of the ratings reflects CBA’s market leading domestic franchise, particularly in retail banking, as well as the Bank’s conservative risk profile, robust capital levels and consistently strong earnings generation ability.

The positive trend takes into account CBA maintaining solid revenue generation in 2021 due to above market volume growth in all products, and its robust asset quality profile, despite the challenging operating environment. This was in part due to unprecedented government support but this also confirmed the bank’s well-entrenched franchise in Australia. Additionally, in DBRS Morningstar’s view the Bank’s conservative underwriting standards are supportive of continued solid asset quality as government support is withdrawn. The positive trend also incorporates the lower reliance on wholesale funding in recent years, further evidence that this is likely to be maintained would be viewed positively. In addition, the revision of the trend reflects DBRS Morningstar’s view that the Bank has now largely addressed its past operational risk management issues.

RATING DRIVERS
An upgrade of the long-term ratings would require the Bank’s lower reliance on wholesale funding to be maintained while continuing to generate strong earnings and maintain the high capital levels.

The long-term ratings would return to Stable if CBA experiences a material increase in wholesale funding from current levels. A downgrade would be triggered by a prolonged material deterioration in asset quality, combined with lower returns and capital levels. Furthermore, a downgrade of the long-term ratings would occur if, in DBRS Morningstar’s opinion, the likelihood of timely systemic support were reduced.

RATING RATIONALE
Franchise Combined Building Block (BB) Assessment: Very Strong
Commonwealth Bank of Australia (CBA) is the largest Australian bank with AUD 1.1 trillion in total assets at end-June 2021 and very strong positions in the Australian retail banking sector, including market shares of 25.3% in home lending and of 27.4% in household deposits. The Bank also has robust market shares in New Zealand of 21.6% in home lending and 18.2% in household deposits. Reflecting management's strategy to reduce complexity and risk by focusing on the core banking operations, CBA has been divesting certain overseas and wealth management assets.

Earnings Combined Building Block (BB) Assessment: Strong
CBA continues to demonstrate strong earnings generation despite higher provisions in the FY 2021 and the more challenging economic environment triggered by the COVID-19 pandemic, and this resilience is a key consideration for the Positive trend. Volume growth has offset a declining NIM in FY21 due to the low interest rate environment albeit the NIM is still solid at 2.03%. The improved economic outlook in 2021 drove lower provisions. Provisions declined to AUD 554 million (7bps) in FY21 from AUD 2,518 million (33bps) in FY20. As a result, CBA reported net profits up both on a statutory basis and cash basis in FY21 (which refers to the Bank’s underlying results and excludes non-cash items and unrealized gains and losses related to hedging and IFRS volatility). Net profit after tax from continuous operations totaled AUD 8,653 million, up 20% compared to FY20 on a cash basis.

Efficiency levels are very good with a cost-to-income ratio from continuous operations of 47.0% in FY21 (vs. 45.9% in FY20). Nonetheless, operating costs on a cash basis were up 3.3% in the year, reflecting CBA’s investment in its franchise with the enhancement of its digital and technological capabilities, together with the remediation of past misconduct issues with the strengthening of its operational risk and compliance frameworks.

Risk Combined Building Block (BB) Assessment: Strong
Credit quality remains strong. The impaired and troublesome loans ratio remains below 1%, meanwhile total troublesome and impaired loans decreased on an absolute basis to AUD 7.5 billion at end-FY21 from AUD 8.7 billion at end-FY20, reflecting the ongoing support provided by the Australian government. The overall quality of the Australian home loans portfolio remained strong with the majority of payment deferrals paying again (above 90%), and the impaired home loans ratio was low at 0.3% of total home lending (and 0.2% of total lending). With regards to the Bank's exposures to sectors most affected by COVID-19 (Commercial Property, Agriculture & Forestry, Accommodation, Cafes & Restaurants, and Retail Trade), less than 0.1% of this book were under payment deferrals at end-FY21 vs 15% at end-FY20. Regarding conduct issues, DBRS Morningstar views CBA as having made significant progress in rectifying identified operational risk shortcomings, as recently communicated by APRA.

Funding and Liquidity Combined Building Block (BB) Assessment: Strong/Good
CBA has a well-managed funding profile, supported by good access to the markets, good diversification. The Bank’s net loan-to-deposit ratio, as calculated by DBRS Morningstar, decreased to 109% at end-FY21, from 113% at end-FY20 and 122% at end-FY19 on the back of a significant increase in deposits, which further increased by about AUD 62 billion in FY21 (up about 9% YoY). The increase in deposits has been supported savings that continued beyond lockdown periods. We expect this liquidity to remain in the market. As a result, reliance on wholesale funding has been gradually reducing, now accounting for 21% of total funding at end-FY21 and down from 25.4% at end-FY20. At end-FY21, the Bank has ample liquidity with a Liquidity Coverage Ratio of 129% (or AUD 40 billion in excess of regulatory minimum), while CBA’s Net Stable Funding Ratio was 129%.

Capitalisation Combined Building Block (BB) Assessment: Very Strong/Strong
DBRS Morningstar views CBA as having a very robust capital position and being well-placed to continue to address the challenging environment and this is another key consideration supporting the Positive trend. On an internationally comparable basis, CBA’s CET1 ratio was 19.4% and its leverage ratio was 6.9% at end-FY21. The APRA Common Equity Tier 1 (CET1) ratio increased to 13.1% at end-FY21 from 11.6% at end-FY20, with the increase reflecting organic capital generation and the gains from the divestments of assets. This is well above the minimum requirement of 8% and APRA’s requested “unquestionably strong” benchmark of 10.5%.

Further details on the Scorecard Indicators and Building Block Assessments can be found at: https://www.dbrsmorningstar.com/research/386452

ESG CONSIDERATIONS

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in AUD unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisaitons (19 July 2021) https://www.dbrsmorningstar.com/research/381742/global-methodology-for-rating-banks-and-banking-organisations Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021) https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings

The sources of information used for this rating include Australian Prudential Regulatory Authority, CBA Annual Report FY2021, CBA Results Presentation FY2021, CBA FY21 Profit Announcement, CBA FY21 Basel III Pillar 3 Disclosure, 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.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third-Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: NO

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 12-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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/386449

This rating is endorsed by DBRS Ratings GmbH for use in the European Union.

Lead Analyst: Vitaline Yeterian, Senior Vice President, Global Financial Institutions
Rating Committee Chair: Ross Abercromby, Managing Director, Global Financial Institutions
Initial Rating Date: January 24, 2005
Last Rating Date: November 12, 2020

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