Find below the full text of a newly released assessment of the Australia’s big four banks’ credit ratings. All four were affirmed. However, the most important line the release is the following:
The Support Ratings and Support Rating Floors of the major Australian banks reflect their systemic importance, and an extremely high probability of support from the Australian authorities, if needed. A change in the ability of the Australian authorities to provide support may result in a change in these ratings – this is likely to be reflected in a downgrade of the Australian sovereign (AAA/Stable). The Support Ratings and Support Rating Floors of all four banks are vulnerable to global regulatory initiatives aimed at reducing implicit government support available to banks.
S&P is on the record demanding a drive to surplus “across the cycle” to maintain the rating. It will be intriguing to watch how much leeway the CRAs offer as the pressures on the Budget remain strong for the next two years. They can’t very well be represented as counter-cyclical can they? If I was a hotshot ratings analyst looking to make my name in the new normal, I would be watching Australia very closely.
Full release below. Note that Moody’s also released a stable assessment of Australian RMBS today as well, which is also provided.
Fitch Ratings-Sydney/Singapore-18 February 2013: Fitch Ratings has affirmed the ratings of Australia’s four major banking groups – Australia & New Zealand Banking Group (ANZ), Commonwealth Bank of Australia (CBA), National Australia Bank Limited (NAB) and Westpac Banking Corporation (WBC). The Outlook on each bank’s Long-Term Issuer Default Ratings (IDR) is Stable. A full list of rating actions can be found at the end of this release.
The rating review focused on the Australia-domiciled entities within each group and therefore does not encompass their overseas subsidiaries. These will be reviewed at a later date as part of Fitch’s normal review process.
RATING ACTION RATIONALE
The rating affirmations reflect the banks’ dominant franchises in Australia and New Zealand, strong and stable profitability, generally robust risk management, solid liquidity management and adequate capitalisation. The agency also takes comfort from the banks’ straightforward and transparent business models, and the conservative and hands-on approach of the Australian prudential regulator. Offsetting these factors are a structural reliance on wholesale funding, particularly from offshore markets, and high household indebtedness in Australia.
RATING DRIVERS AND SENSITIVITIES – Viability Ratings (VRs) and IDRs
The Long- and Short-Term IDRs of all four banks are driven by their VRs. The major Australian banks have improved their funding profiles since 2008, growing the proportion of deposits, reducing their use of short-term wholesale funding, particularly from offshore sources, and increasing the duration of their wholesale funding portfolios. Nevertheless, at just under 40% of total funding, the reliance on wholesale funding is high relative to international peers and exposes the banks to dislocation in international wholesale funding markets. Fitch expects the banks to focus on improving funding stability – either through further lengthening of wholesale funding and/or increased use of customer deposits. Structural issues, such as Australia’s compulsory pension scheme, mean wholesale funding is likely to remain an important part of the banks’ funding structures.
The risks associated with these profiles are generally well managed, with wholesale funding diversified by geography, product, investor and maturity, fully collateralised swaps used to hedge all foreign currency borrowings and by maintaining significant holdings of high-quality liquid assets that are eligible for central bank repo-facilities. The banks all undertake substantial investor meeting programmes to maintain confidence in the system.
The banks’ sound asset quality, robust and stable earnings and straightforward and transparent business models also contribute to investor confidence. As a result, the major Australian banks have largely maintained access to wholesale funding markets since the onset of the global financial crisis.
Fitch expects revenue growth to come under some pressure during 2013 as a result of modest credit growth and continued elevated funding costs, particularly for deposits. In addition, the agency expects a mild deterioration in the operating environment in Australia, which may place some modest pressure on asset quality and result in impairment charges. A hard landing in China could produce a more significant deterioration in asset quality although Fitch believes this scenario is unlikely.
The banks’ capital positions are adequate for their business mix and risks. The conservative interpretation of the Basel rules by the Australian regulator means headline regulatory and Fitch capital ratios are lower than those of international peers. However, on a globally harmonised basis Australian banks’ ratios compare well with those of international peers. The Basel III framework was implemented on an advanced timetable from 1 January 2013 – Fitch does not believe any of the four banks will have difficulty in meeting the new requirements.
Rating upside for the major Australian banks is limited, given their current high ratings and weaker funding profile relative to those of similarly rated international peers.
The VRs and IDRs of all four banks could be adversely affected by a material deterioration in their funding and liquidity profiles, leaving them susceptible to prolonged funding market dislocation; and a more significant asset quality deterioration, such as may occur following a hard landing in China, which negatively impacts profitability and capitalisation. Rating downside may also result if there were a major loosening of credit underwriting standards in the pursuit of loan growth in a modest credit growth environment.
In addition, ANZ and NAB face some risks that are less evident at the more domestically focused CBA and WBC. To date, ANZ’s Asian expansion has been measured and the overall risk profile of the group has not increased materially. However, if the group materially deviates from its current strategy or were to pursue a large acquisition, thereby increasing its risk profile, negative rating action could occur. NAB’s UK operations leave it more susceptible to a downturn in Europe than its major Australian bank peers and this is reflected in the group’s lower-than-peer profitability. This exposure could leave NAB’s asset quality more exposed to deterioration than domestic peers, particularly if there were a downturn in the UK, and negative rating action could result.
RATING DRIVERS AND SENSITIVITIES – Support Ratings and Support Rating Floors
The Support Ratings and Support Rating Floors of the major Australian banks reflect their systemic importance, and an extremely high probability of support from the Australian authorities, if needed. A change in the ability of the Australian authorities to provide support may result in a change in these ratings – this is likely to be reflected in a downgrade of the Australian sovereign (AAA/Stable). The Support Ratings and Support Rating Floors of all four banks are vulnerable to global regulatory initiatives aimed at reducing implicit government support available to banks.
RATING DRIVERS AND SENSITIVITIES – Government-guaranteed Debt
The government-guaranteed debt of the major Australian banks carries the same rating as the Australian sovereign. Any change in the sovereign rating will be reflected in the ratings of the government-guaranteed debt.
RATING DRIVERS AND SENSITIVITIES – Senior Unsecured Debt
The ratings of the major Australian banks’ senior unsecured debt are aligned with each entity’s Long- and Short-Term IDRs. Any change in the IDRs will be reflected in the ratings of the senior unsecured debt.
RATING DRIVERS AND SENSITIVITIES – Subordinated Debt and Hybrid Instruments
The ratings of the major Australian banks’ subordinated debt are notched one level down from the VRs for loss severity – no notching has been applied for non-performance risk. Hybrid capital instruments are notched five levels from the respective banks’ VRs – two notches to reflect loss severity and three to reflect non-performance risk. These instrument ratings are likely to move in line with the VRs of the banks.
RATING DRIVERS AND SENSITIVITIES – Domestic Subsidiaries
Colonial Finance Limited (CFL) is a wholly-owned subsidiary of CBA and is the only domestic subsidiary of the four major Australian banks rated by Fitch. CFL’s ratings reflect its strategic importance to CBA. Any change in CBA’s Long-Term IDR is likely to result in a similar notch movement in CFL’s ratings.
The four major Australian banks dominate the Australian and New Zealand banking systems. At 31 December 2012, the four banks combined held 79% of Australian banking system assets, while in New Zealand this was 87% at 30 September 2012.
Moody’s on RMBS:
Sydney, February 19, 2013 — Moody’s Investors Service expects a stable outlook in 2013 for the Australian Residential Mortgage-Backed Securities (RMBS), Asset-Backed Securities (ABS) and Covered Bond (CB) markets.
According to a just-released Moody’s report titled, “Australian RMBS, ABS and Covered Bonds: 2013 Outlook,” the market for RMBS and ABS will be stable because Moody’s expects a low level of delinquencies and losses, underpinned by an expected GDP growth rate of 2.5%-3.5%, a continued low interest rate environment, and a steady unemployment rate of 4.5%-5.5%.
“Losses in the RMBS market will be limited because of the amount of equity buffers available for mitigating losses in the event of obligor defaults. We expect these buffers to be supported by stable housing prices in 2013, loan seasoning, the long-term trend in house-price appreciation, and continued deleveraging,” says Irene Kleyman, a Moody’s Vice President and Senior Analyst and one of the authors of the report.
For RMBS, the continuation of Australia’s low interest rate environment will be the main reason for stable delinquencies. Moody’s expects RMBS 30 days past due delinquencies in 2013 to stay at around the current levels. As at December 2012, 30 days past due delinquencies were 1.44%.
“In the ABS sector, losses are likely to increase only marginally, and will remain low overall, as recovery rates stay just below their long-term average range of 50%-55%. The expected slight drop in recovery rates is based on the expectation of continued strength in new car sales in 2013,” adds Kleyman.
However, the report points out that the soft labor market, reflected in the underemployment rate and the recent slowdown in job growth represents a downside risk for delinquencies and potentially ultimate defaults in the collaterals of the RMBS and ABS sectors.
On covered bond programs, the report says the market will be stable in the next 12 months because of the solid financial standing of sponsors, Australia’s strong sovereign rating and the stable credit quality of residential mortgage collateral.
On the regulatory front, the report says three governmental initiatives will help improve the development of the Australian securitization market. Specifically, each will individually promote, for transactions, (1) better alignment of interests between issuers and investors, (2) flexibility for issuers to retain greater proportion of their own deals, and (3) more transparency in collateral reporting.
“Moreover, in terms of issuance, we expect an increase in RMBS and ABS issuance in 2013, because the tightening spreads have made it more
economically viable for originators to issue both types of securities,” says Kleyman.“Covered bond issuance will continue to be robust in 2013 because issuers have around AUD 100 billion in spare capacity. However, there are some signs of a resurgence in investor appetite for securitized products, which may slightly constrain the issuance of CBs,” says Kleyman. Australian issuers have the capacity to issue up to AUD 144.3 billion of covered bonds, of which the banks have issued only AUD 44 billion.
