DBRS Morningstar Confirms ANZ’s Long-Term Issuer Ratings at AA, Stable Trend

DBRS Ratings Limited (DBRS Morningstar) confirmed the credit ratings of Australia and New Zealand Banking Group Limited (ANZ or the Group), including the Long-Term Issuer Rating at AA and the Short-Term Issuer Rating at R-1 (high). The trend on all credit ratings is Stable. The Intrinsic Assessment (IA) of the Group 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 ANZ’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 credit ratings at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS

The confirmation of the ratings reflects ANZ’s franchise strength in its home markets of Australia and New Zealand, where it has meaningful market shares for loans and deposits as well as its good business diversification, sound customer deposit base and strong earnings generation. The ratings also take into account the Group’s robust asset quality, despite the challenging operating environment of higher interest rates, and the continued progress in addressing past operational risk shortcomings. The ratings, however, also take into account that the Group makes relatively extensive usage of wholesale funding compared to peers.

CREDIT RATING DRIVERS

Over the medium-term, an upgrade of the credit ratings would require consistent improvement in profitability and lower usage of wholesale funding whilst maintaining robust asset quality and capital.

A downgrade of the credit ratings could occur if there is a prolonged material deterioration in profitability and asset quality, materially impacting capital. Furthermore, a downgrade of the long-term ratings would occur if, in DBRS Morningstar’s opinion, the likelihood of timely systemic support were reduced.

CREDIT RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Very Strong/Strong
ANZ is one of the largest Australian banking groups, with total assets of AUD 1,105.6 billion at end-September 2023 (FY23). The Group has significant market shares in home loans in Australia of 13.0% and 30.5% in New Zealand and is one the most diversified Australian banks by business lines. ANZ completed a Group restructuring in FY23 through the creation of a holding company and a separation of banking businesses from non-banking businesses into the ANZ Bank Group and ANZ Non-Bank Group. Furthermore, In June 2022, ANZ announced an agreement to purchase 100% of the shares in SBGH Limited, the holding company of Suncorp Bank, the 6th largest bank in Australia. Pending various regulatory approvals the transaction was expected to be completed in H1 2023. However, Australian Competition and Consumer Commission (ACCC) declined the approval in August 2023, and this is currently subject to review by the Australian Competition Tribunal. The Group still expects the acquisition to happen in FY24.

Earnings Combined Building Block (BB) Assessment: Strong/Good
ANZ has consistently reported sound earnings over the years supported by its strong and diversified banking franchise in Australia and New Zealand. More recently, the Group’s earnings have benefitted from the higher interest rate environment. On a statutory basis, the Group reported net profit attributable to shareholders of the company of AUD 7,098 million in FY23, flat Year-on-Year (YOY). On a cash profit and continuing operations basis (which excludes one off gains), cash profit was AUD 7,405 million, significantly up 14% YOY and largely reflecting the growth of net interest income (NII) driven by loan volume and margin growth on the back of higher interest rates. FY23 results also included higher loan impairment charges after significant loan loss reversals in the previous two years, although the cost of risk remained extremely low at 3 bps (as calculated by DBRS Morningstar). ANZ continued to maintain sound cost discipline in FY23 despite high inflation and continued investment in IT. ANZ's cost-to-income ratio was 50% in FY23, similar to the year before. The reported return on equity (ROE), on cash profit and continuing operations basis, was 11.7% in FY23, up from 10.9%, in FY22 and 10.4% in FY21.

Risk Combined Building Block (BB) Assessment: Very Strong/Strong
ANZ has a generally conservative credit risk profile and robust asset quality supported by the strong economic environment in its home markets. However, the rapid increase in interest rates and high inflation is starting to translate into some signs of asset quality deterioration in the form of higher Stage 3 and Stage 2 loans, although from low levels. Stage 3 loans remained very low accounting for 0.7% of total gross loans at end-FY23 and below the levels seen in FY18-FY21; and Stage 2 loans accounted for 9% of total gross loans at end-FY23, the same level as at end-FY22. At end-FY23, the CRE portfolio represented 7.5% of total gross lending activities, with the majority of the exposure concentrated in Australia and the portfolio continues to perform well with an impaired asset to exposure at default of 0.4% at end-FY23, compared to 0.3% at end-FY22.

Funding and Liquidity Combined Building Block (BB) Assessment: Strong/Good
ANZ’s funding position is supported by a large customer deposit base in its home markets of Australia and New Zealand. Customer deposits (including certificates of deposits) have increased in recent years and were up 4.3% YOY to AUD 647.1 billion at end-FY23, largely driven by growth in Australia, and despite the challenging environment of high interest rates and inflation. As a result, the net loan-to deposit ratio (including certificates of deposits) was 103% at end-FY23. However, ANZ, similar to its Australian peers, makes ample usage of wholesale funding, which totalled AUD 274.9 billion at end-FY23 (as calculated by DBRS Morningstar and excluding certificates of deposits), and which represent a relatively high 29% of total non-equity funding. However, DBRS Morningstar notes that wholesale funding diversification has improved over the years and the funding is well-diversified by investor, maturity, instrument and currency The Group's liquidity position is strong with an average Liquidity Coverage Ratio (LCR) ratio of 133% at end-FY23, and a Net Stable Funding Ratio (NSFR) ratio of 116% at end-FY23.

Capitalisation Combined Building Block (BB) Assessment: Strong
ANZ has a strong capital position underpinned by its strong earnings generation and sound access to capital markets. At end-FY23, ANZ’s APRA CET1 ratio was 13.34%, up 105 bps from end-FY22, largely driven by strong earnings generation and a positive impact from the implementation of APRA’s capital reform. On a pro-forma basis including the Suncorp Bank acquisition (-128 bps) and surplus capital in the Non- operating holding company (+ 3 bps), the end-FY23 CET1 ratio was 12.09%, amply above the APRA’s minimum CET1 ratio of 10.25%.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/423683.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Governance (G) Factors
The Subfactor ‘corporate governance’ remains relevant to the credit rating of ANZ but does not affect the overall credit rating or trend assigned to the bank. This is reflected in the Risk grid building block. ANZ continues to make good progress in addressing the governance and operational risk shortcomings that were flagged by APRA and the Royal Commission in 2018 and 2019. The risk shortcomings resulted in APRA requiring ANZ to hold a capital add-on of AUD 500 million in 2018. DBRS Morningstar expects the capital add-on to remain in place until APRA is satisfied with ANZ’s improvement in its operational risk framework.

There were no Environmental or Social factors that had a significant or relevant effect on the credit analysis.

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 (4 July 2023) https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Notes:

All figures are in AUD unless otherwise noted.

The principal methodology is the Global Methodology for Ratings Banks and Banking Organisations (22 June 2023) https://www.dbrsmorningstar.com/research/415978/global-methodology-for-rating-banks-and-banking-organisations. In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

The sources of information used for this credit rating include Morningstar Inc. and Company Documents, ANZ 2023 Annual Report, ANZ Full Year 30 September 2023 Consolidated Financial Report Dividend Announcement and Appendix 4E, ANZ 2023 Results Presentation & Investor Discussion Pack, ANZ 2023 ESG Supplement, ANZ 2023 Corporate Governance Statement, ANZ 30 September 2023 Pillar 3 Disclosure. DBRS Morningstar considers the information available to it for the purposes of providing this credit 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 credit rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar's outlooks and credit 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: https://registers.esma.europa.eu/cerep-publication. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://www.dbrsmorningstar.com/research/423682

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

Lead Analyst: Maria Rivas, Senior Vice President, Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of Global FIG
Initial Rating Date: 25 January 2005
Last Rating Date: 24 November 2022

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