DBRS Morningstar Confirms National Australia Bank’s LT Issuer Rating at AA, Trend Remains Stable

DBRS Ratings Limited (DBRS Morningstar) confirmed the ratings of National Australia Bank Limited (NAB or the Bank), including the Long-Term Issuer Rating at AA and the Short-Term Issuer Rating at R-1 (high). The trend on all ratings is 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 NAB’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 NAB’s strong domestic franchise, particularly in business banking, as well as its resilient earnings generation ability, sound asset quality indicators, an improving funding profile and strong capital levels. NAB’s operating profitability remains strong despite the more challenging environment, including lower interest rates and the impact of the COVID-19 pandemic.

RATING DRIVERS
An upgrade of the ratings would require the Bank to improve its already strong earnings, while maintaining a resilient credit profile, and a consistently lower reliance on wholesale funding.

A downgrade of NAB’s ratings would be driven by either sustained lower profitability, combined with marked deterioration in asset quality. In addition, a downgrade of the 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/Strong
NAB is a leading Australian bank with a strong franchise in its core markets of Australia and New Zealand, and a select presence in Asia providing services to Australian-based business banking customers with interests in the region. Domestically, the Bank's franchise lies predominantly in business banking (including a market share of 22% in Australia), with this complemented by a sound position in retail banking, including a market share of 14.4% in mortgage lending. NAB also has strong market shares in New Zealand, with a market share of 22.5% in business lending and a 16.5% mortgage lending market share. Similar to its Australian peers, NAB has re-focused towards strengthening its core businesses.

Earnings Combined Building Block (BB) Assessment: Strong/Good
NAB continues to generate solid earnings. NAB reported net profit attributable to owners of AUD 6,364 million on a statutory basis in FY21, two and a half times higher than FY20, largely reflecting releases of impairment provisions, due to both an improved macroeconomic outlook and credit quality metrics. Total income in FY21 was supported by business momentum in Business and Private Banking and the New Zealand division, but offset by a decline in Corporate and Institutional Banking, and overall net interest income, which is the main contributor to total income, was largely flat year-over-year. The Bank's cost-to-income ratio, from continuous operations on a statutory basis, was a sound 46.5% in FY21, improved from 52.4% in FY20 (46.7% in FY19) reflecting productivity benefits achieved through simplification. Excluding large notable items, NAB's cost-to-income ratio was 44.3% in FY20 and 42.8% in FY19. NAB’s statutory return on equity in FY21 was 10.4%, a level higher than in FY19 (9.1%).

Risk Combined Building Block (BB) Assessment: Strong
Credit quality remains strong. The gross impaired and 90+ days past due (DPD) assets ratio as calculated by DBRS Morningstar slightly improved to 0.9% at end-FY21 from 1.0% at end-FY20, in part due to the significant support provided by the Australian government throughout the pandemic. The overall quality of the Australian home loan portfolio remains strong with a dynamic loan to value ratio of 38.8% at end-FY21, a mortgage impaired and 90+ DPD ratio of 1.33%, and a loss rate of just one basis point (vs. a long run average of 0.03%). Exposure to sectors most likely to be affected by the pandemic (Retail Trade, Tourism, Hospitality and Entertainment, Air Travel, Office/Retail/Tourism/Leisure Commercial Real Estate), totalled AUD 73.9 billion representing about 11.7% of the total lending book at end-FY21, however, the impaired and 90+ DPD ratio for those sectors have decreased year-over-year.

DBRS Morningstar notes that AUSTRAC (the Australian Transaction Reports and Analysis Centre) flagged ongoing anti-money laundering weaknesses in June 2021. Although AUSTRAC is not considering any civil penalty, DBRS Morningstar will continue to closely monitor NAB’s progress in further strengthening its operational risk governance framework.

Funding and Liquidity Combined Building Block (BB) Assessment: Strong/Good
NAB has an adequate funding profile. The Bank's net loan-to-deposit (LTD) ratio, as calculated by DBRS Morningstar, stood at 114% at end-FY21 (vs. 116% at end-FY20) supported by higher deposits. However, wholesale funding accounted for 29% of total funding at end-FY21 (end-FY20: 31%), while short-term wholesale funding, mostly commercial paper and repurchase agreements and excluding certificates of deposits, totalled about 25% of total wholesale funding. DBRS Morningstar also notes higher refinancing needs in 2023/2024 compared to NAB’s historical run rate. Overall, liquidity has been sound, including a quarterly average Liquidity Coverage Ratio (LCR) of 128% in Q4 2021 (vs. 139% YoY), while its Net Stable Funding Ratio (NSFR) ratio was 123% at end-FY21 (vs. 127% at end-FY20).

Capitalisation Combined Building Block (BB) Assessment: Strong
DBRS Morningstar views NAB as having a robust capital position. NAB reported an Australian Prudential Regulation Authority (APRA) Common Equity Tier 1 (CET1) ratio of 13.0% at end-FY21, up from 11.5% at end-FY20, largely reflecting organic capital generation. This is well above the minimum requirement of 8% and the “unquestionably strong” benchmark of 10.5% set in 2017 by APRA, as well as NAB’s future target range of 10.75-11.25%. On an internationally comparable basis, NAB’s CET1 ratio was a strong 17.95% at end-FY21 and compares well to international peers.

Further details on the Scorecard Indicators and Building Block Assessments can be found at: https://www.dbrsmorningstar.com/research/388774

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 Organisations (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 NAB FY21 Annual Financial Report, NAB FY21 Investor Presentation, NAB FY21 Management Discussion and Analysis, NAB FY21 ASX Announcement, NAB FY21 Pillar 3 Report, Australian Prudential Regulation Authority 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/388772

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

Lead Analyst: Vitaline Yeterian, Senior Vice President, Global FIG
Rating Committee Chair: Ross Abercromby, Managing Director, Global FIG
Initial Rating Date: 01/24/2005
Last Rating Date: 11/30/2020

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