Morningstar DBRS Confirms CBA's Long-Term Issuer Rating at AA (high), Stable Trend

DBRS Ratings Limited (Morningstar DBRS) confirmed the Long-Term Issuer Rating of Commonwealth Bank of Australia (CBA or the Bank) at AA (high). The Short-Term Issuer Rating was confirmed at R-1 (high). The trend on the ratings remains Stable. The Intrinsic Assessment (IA) of the Bank is AA and the Support Assessment is SA2, which reflects Morningstar DBRS' 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 CREDIT RATING CONSIDERATIONS
The confirmation of CBA's ratings reflects the Bank's robust franchise in its home market of Australia, where it is the leading banking institution in retail banking and has meaningful market shares of both home loans and customer deposits, as well as its strong franchise position in New Zealand. The ratings also consider the Bank's solid capitalisation supported by a robust profitability that benefits from strong revenues, disciplined cost management, and low loan loss provisions driven by robust asset quality with low levels of impaired loans. The ratings also take into account the Bank's improved funding supported by the continued reduction in reliance on wholesale funding. The ratings, however, also reflect the environment of high interest rates and inflation that is translating into some increase in Stage 3 loans, although from low levels.

CREDIT RATING DRIVERS
Given CBA's high credit rating level, an upgrade in the short term is unlikely. Over the longer term, the credit ratings could be upgraded if the Bank's geographical and business diversification significantly increased and provided its risk profile, funding, and capital position is maintained.

A downgrade of the credit ratings could be driven by a sustained weakening of profitability and/or asset quality. Furthermore, a downgrade of the long-term ratings could occur if, in Morningstar DBRS's opinion, the likelihood of timely systemic support was reduced.

CREDIT RATING RATIONALE
Franchise Combined Building Block (BB) Assessment: Very Strong

CBA is a leading Australian bank with total assets of AUD 1,254 billion at end-June 2024 (F2024) and a market leader in retail banking in Australia with shares of around 25% in home lending and 26% in household deposits. In New Zealand, the Bank operates under the ASB brand and has market shares of around 21% in home loans and 17% in customer deposits.

Earnings Combined Building Block (BB) Assessment: Strong

CBA has a strong earnings-generation capacity supported by its leading banking position in Australia and good franchise in New Zealand. On a cash basis, which refers to the Bank's underlying results and excludes non-cash items and unrealised gains and losses related to hedging and IFRS volatility, net profit after tax from continuous operations was AUD 9,836 million, down 2.3% year on year (YOY) from F2023, largely reflecting lower net interest income driven by strong competition for deposits and higher wholesale funding costs. CBA reported a return on equity 13.6% on a cash basis and continuing operations in F2024, slightly down from 13.9% in F2023. The Bank continued to maintain a well-contained cost base. In F2024, total operating expenses were AUD 12,337 million, up 2% YOY largely driven by higher staff costs, higher IT costs, and an increase in software amortisation. CBA operates efficiently, and its cost-to-income ratio was 46% in F2024 compared with 44% in F2023, which compares well with domestic peers. F2024 net profit after tax also benefitted from lower loan loss provisions, which were down 28% YOY to AUD 802 million, largely reflecting lower collective provisions due to rising house prices and an improved economic outlook.

Risk Combined Building Block (BB) Assessment: Very Strong / Strong

CBA has a conservative credit risk profile that is reflected in its sound asset quality and low levels of loan loss provisions. However, CBA's asset quality is showing mild signs of deterioration and Stage 3 loans had significantly increased at end-F2024 from end-F2023, although from a very low baseline, largely reflecting the impact of the higher interest-rate and inflation environment. Total Stage 3 loans grew 26.5% YOY at end-F2024 to AUD 9,406 million to represent 0.99% of total gross loans at that date, up from 0.80% at end-F2023 and 0.82% at end-F2022. The increase in Stage 3 loans was largely driven by a slight uptick in corporate arrears and to a lesser extent by impaired Australian home and New Zealand consumer loans. The Bank's Stage 2 loans, which are loans that have been classified as having experienced a significant increase in credit risk but are not impaired, represented 17% of total gross loans at end-F2024, stable from end-F2023. CBA's exposure to the commercial property sector totalled AUD 94.9 billion, accounting for 6.9% of total committed exposures (TCEs) at end-F2024, slightly up from 6.6% of TCEs at end-F2023, although the portfolio appears to be well diversified by asset type. This portfolio has also reflected deterioration with troublesome and impaired assets increasing to 1.3% at end-F2024 from 1.0% the year before, a level that still compares well with most domestic and international peers.

Funding and Liquidity Combined Building Block (BB) Assessment: Strong / Good

CBA's funding and liquidity position is sound. Total customer deposits, including certificates of deposits, totalled AUD 879.1 billion at end-F2024, up 2% YOY, largely driven by growth of domestic retail deposits. The Bank's net loan-to-deposit ratio remained at 107% at end-F2024, as calculated by Morningstar DBRS, in line with the last two previous years. CBA's usage of wholesale funding as a proportion of total nonequity funding has been declining since F2021. At end-F2024, wholesale funding accounted for 19% of total nonequity funding, down from 21% at end-F2023 and 26% at end-F2019, which compares well to its domestic peers. However, short-term funding, (which includes commercial paper and debt with an original maturity or call date of less than or equal to 12 months), represented 5% of total nonequity funding and totalled AUD 50.4 billion, has grown significantly from AUD 26.3 billion the year before. The increase in the short-term funding is largely explained by the full repayment of the Reserve Bank of Australia's outstanding AUD 33 billion Term Funding Facility in F2024. CBA has well-diversified wholesale funding by instrument and currency, largely in AUD, USD, or EUR, and the Bank has manageable refinancing needs of around AUD 25 billion to AUD 27 billion per year until F2027. CBA's liquidity is sound with a Liquidity Coverage Ratio of 136% and a Net Stable Funding Ratio of 116% at end-F2024.

Capitalisation Combined Building Block (BB) Assessment: Strong

CBA's capitalisation is strong, supported by its strong earnings-generation ability and good access to capital markets. The Bank reported an Australian Prudential Regulation Authority (APRA) CET1 ratio of 12.3% at end-F2024, broadly in line with end-F2023 as capital generation from earnings was fully offset by dividend payment, share buybacks, and higher risk-weighted assets (RWAs), largely from growth. The CET1 ratio is comfortably above APRA's minimum requirement of 10.25% and CBA's capital cushion above the new minimum requirement is 205 basis points (bps), improved from 195 bps at end-F2023. CBA expects to operate with a post-dividend CET1 ratio greater than 11%. In terms of the loss-absorbing capacity requirement for Domestic-Systemically Important Banks, CBA had Tier 2 instruments that represented 6.6% of RWAs at end-F2024, already above the minimum 6.5% required by January 1, 2026.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/441270.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

There were no Environmental/Social/Governance 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 Risk 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 (04 June 2024) https://dbrs.morningstar.com/research/433881. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk 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, Commonwealth Bank of Australia (CBA) Annual Report F2024-F2023, CBA Profit Announcement for the full year ended 30 June 2024, CBA Results Presentation and Investor Discussion Pack F2024, CBA Fixed Income Investor Discussion Pack F2024, CBA Climate Report 2024. 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's 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/441271.

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: January 24, 2005
Last Rating Date: October 19, 2023

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