Morningstar DBRS Confirms Australia and New Zealand Banking Group Limited's Long-Term Issuer Rating at AA, Stable Trend
Banking OrganizationsDBRS Ratings Limited (Morningstar DBRS) 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 Morningstar DBRS' expectation of timely systemic support, given ANZ's importance to the financial systems 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 credit 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 a sound funding and liquidity position partly supported by a sound customer deposit base and, sound asset quality, despite some modest deterioration in the Australian mortgage and business loan portfolio driven by the high inflation and interest rate environment. The credit ratings also reflect ANZ's resilient profitability supported by sound revenues, good cost discipline, and low loan loss provisions. The credit ratings, however, also consider that the Group makes relatively extensive usage of wholesale funding compared with most domestic and international peers. Morningstar DBRS has concerns over the Group's progress in improving operational risk following additional findings of shortcomings related to the trading business but considers the economic impact of potential fines from these findings to be manageable given the Group's strong earnings generation ability.
The confirmation of the credit ratings also considers ANZ's acquisition of Suncorp Bank (Suncorp), which was completed at the end of July 2024. Morningstar DBRS believes Suncorp should strengthen the Group's retail franchise position in Australia and is manageable from a capital and integration risk perspective.
CREDIT RATING DRIVERS
Over the longer term, Morningstar DBRS could upgrade the credit ratings if there is a sustained improvement in profitability, lower usage of wholesale funding, and robust asset quality and capitalisation. Morningstar DBRS would also require evidence that ANZ has improved its operational risk management.
Morningstar DBRS could downgrade ANZ's credit ratings if there is a prolonged material deterioration in profitability and asset quality or a material impact to the franchise or capitalisation because of elevated operational risk. Moreover, a downgrade would also occur if Morningstar DBRS believed 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 1,089.7 billion at the end of March 2024 (H1 2024). The Group has significant market shares in home loans in Australia, at 13.5%, and New Zealand, at 30.5%, and is one the most diversified Australian banks by business lines. In July 2024, ANZ announced it completed its acquisition of 100% of the shares in Suncorp Bank, the sixth-largest bank in Australia. Suncorp will largely reinforce ANZ's mortgage position in certain Australian markets. The acquisition had a limited impact from a capital perspective as the Group completed a AUD 3.5 billion capital raise in F2022.
Earnings Combined Building Block (BB) Assessment: Strong/Good
Morningstar DBRS considers ANZ's earnings generation as sound and resilient, supported by a good banking franchise, generally good cost control, and low loan loss provisions. On a statutory basis, the Group reported net profit attributable to shareholders of the company of AUD 3,407 million in H1 2024, 4.2% down Year-on-Year (YOY), largely reflecting margin pressure and growth of operating costs mostly driven by wage inflation and IT investments. On a cash profit and continuing operations basis (which excludes one off gains), cash profit was AUD 3,552 million in H1 2024, down 7.2% from the year before. ANZ reported a return on equity, on a cash profit and continuing operations basis, of 10.1% in H1 2024 (or 10.7% adjusted by the Suncorp Bank acquisition), which is lower than the 11.7% in F2023, the 10.9% in F2022, and the 10.4% in F2021. The Group's statutory net interest margin (NIM) declined to 1.56% in H1 2024, down from 1.65% in F2023 and 1.63% in F2022 showing some pressure on asset pricing driven by intense competition for mortgages and commercial loans in Australia. In H1 2024, operating costs on a statutory basis were up 4.4% to AUD 5,215 million, driven by higher staff costs, higher IT costs driven by inflation, and restructuring expenses driven by operational changes across all divisions. ANZ's cost-to-income ratio was 51% in H1 2024, stable YOY and in line with F2023. Credit impairment charges were lower YOY in H1 2024 partly driven by a decrease of management temporary adjustments, which were much higher a year ago, reflecting higher economic and operating uncertainty. The cost of risk (as calculated by Morningstar DBRS) was 2 basis points (bps) in H1 2024, improved from 4 bps in H1 2023.
Risk Combined Building Block (BB) Assessment: Strong
ANZ's asset quality has remained sound with low levels of impaired loans. However, the challenging interest rate and high inflation environment has resulted in growth of Stage 3 and Stage 2 loans from the end of F2023. At the end of H1 2024, ANZ's Stage 3 loans increased 20% from the end of F2023 to AUD 5,891 million, largely driven by growth in restructured home loans and small and medium-size enterprise downgrades. At the end of H1 2024, the Stage 3 loan ratio was 0.85%, slightly up from 0.72% at the end of F2023 but still better than most domestic and international peers. ANZ's Stage 2 loans, which are loans that have seen a significant increase in credit risk but are not impaired, were up 5.0% from the end of H1 2024 to represent 9.9% of total gross loans at the end of H1 2024, in line with F2021 to F2023. The increase in Stage 2 loans was largely driven by credit model adjustments. Including the Suncorp acquisition, Morningstar DBRS expects Group's Stage 3 loans to increase by 10% although the Group's Stage 3 loan ratio should remain similar to the 0.85% reported at the end of H1 2024. At the end of H1 2024, the commercial real estate portfolio represented 7.6% of total gross lending activities, with the majority of the exposure concentrated in Australia, and the impaired asset to exposure at default was 0.3% at the end of H1 2024, broadly in line with the end of F2023 and F2022. Gross impaired assets declined to AUD 208 million at the end of H1 2024 from AUD 241 million.
Funding and Liquidity Combined Building Block (BB) Assessment: Strong/Good
ANZ's sound funding and liquidity position is underpinned by its large customer deposit base in its home markets of Australia and New Zealand. ANZ, like most domestic peers, benefitted up to F2023 from significant growth of customer deposits largely driven by excess liquidity after the pandemic. However, customer deposit growth remained broadly flat from the end of H1 2024 (including certificates of deposits). The Group's net loan-to deposit ratio (including certificates of deposits) was 105% at the end of H1 2024, compared with 103% at the end of F2023. The Suncorp acquisition will add around AUD 53.8 billion of customer deposits. However, ANZ, like its Australian peers, makes ample usage of wholesale funding, which totalled AUD 281 billion at the end of H1 2024 (as calculated by Morningstar DBRS and excluding certificates of deposits) and represents a relatively high 29% of total nonequity funding. However, Morningstar DBRS notes that refinancing needs for the next few years are manageable, 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 of 134% at the end of H1 2024, and a Net Stable Funding Ratio of 118% at the end of H1 2024.
Capitalisation Combined Building Block (BB) Assessment: Strong
ANZ has a strong capital position underpinned by its sound earnings generation and sound access to capital markets. On a pro forma basis including the Suncorp acquisition, the adjusted CET1 ratio was 12.00% at the end of Q3 2024, down from 13.50% at the end of H1 2024 and 13.34% at the end of F2023, reflecting the negative impact of the Suncorp acquisition net of the output floor (-105 bps), a decrease of risk-weighted assets because of model adjustments (+30 bps), and dividend distribution (-52 bps).. The additional capital add-on of AUD 250 million imposed from August 2024 related to risk shortcomings in the Group's Markets Business will translate into a 6-bp drop of the CET1 ratio. This will be fully offset by the positive impact of approval of risk weightings on mortgages under the Group's Internal Ratings Based (IRB) models, which is expected to raise the Group's F2024 CET1 ratio by 30 bps. The CET1 ratio remains above Australian Prudential Regulation Authority's (APRA) 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/440936.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Governance (G) Factors
The corporate governance factor remains relevant to the credit rating of ANZ but does not affect the overall credit ratings or trends assigned to the bank. This is reflected in the Risk Grid's building block. Whilst 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, Morningstar DBRS has increasing concerns over additional shortcomings that were identified in H1 2024. In July 2024, ANZ announced that it was being investigated for potential trading and conduct issues related to data reporting concerns, misreporting on 2023 bond transactions and conduct and operational risk deficiencies in its Sydney dealing room. Further, in August 2024, APRA required the Group to hold an additional capital add-on of AUD 250 million over nonfinancial risk management concerns, in addition to the already in place capital add-on of AUD 500 million that was required back in 2018. As a result, the total capital add-on has increased to AUD 750 million. In relation to the new risk shortcoming findings, APRA has also required the Group to appoint an external party to review the Markets Business' governance and risk management framework and implement a remedial plan to improve risk deficiencies. Morningstar DBRS expects the capital add-on to remain in place until ANZ improves operational risk management and framework to APRA's satisfaction.
There were no Environmental or Social factors that had a significant or relevant effect on the credit analysis.
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024), https://dbrs.morningstar.com/research/437781.
Notes:
All figures are in Australian dollars unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (4 June 2024), https://dbrs.morningstar.com/research/433881. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings https://dbrs.morningstar.com/research/437781 in its consideration of ESG factors.
The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.
The sources of information used for these credit ratings include Morningstar, Inc. and company documents, ANZ Group Holdings Q3 2024 Trading Update, ANZ Group Holdings 2023 Report, ANZ Group Holdings H1 2024 Presentation and Investor Discussion Pack, and ANZ 2023 Climate report. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings to be of satisfactory quality.
With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, these are unsolicited credit ratings. These credit ratings were 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
Morningstar DBRS 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. Morningstar DBRS' outlooks and credit ratings are under regular surveillance.
For further information on Morningstar DBRS 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 Morningstar DBRS 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/440934.
These credit ratings are endorsed by DBRS Ratings GmbH for use in the European Union.
Lead Analyst: Maria Rivas, Senior Vice President, Sector Lead - European Financial Institution Ratings
Rating Committee Chair: William Schwartz, Senior Vice President - Global Fundamental Ratings, Credit Practices
Initial Rating Date: 25 January 2005
Last Rating Date: 21 November 2023
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