Fitch dumps WBC and ANZ onto negative watch

VIABILITY RATING, IDRS AND SENIOR UNSECURED DEBT
The revision of the rating Outlook to Negative reflects the risk that ANZ’s focus on remediating operational and compliance risk issues and culture may result in the diversion of resources from ongoing operations, which could ultimately lead to a weakening of ANZ’s earnings relative to peers. The affirmation of ANZ’s ratings reflects Fitch‘s expectation that despite these challenges, the bank will maintain its strong company profile in the short term, which in turn supports its sound financial profile.

The Australian Prudential Regulation Authority’s (APRA) announcement on 11 July 2019 that it was applying additional operational-risk capital requirements to ANZ in response to the bank’s self-assessment on governance, accountability and culture is the main driver for Fitch‘s rating action. The additional capital requirements should remain manageable and not impair the bank’s ability to meet the authority’s ‘unquestionably strong’ targets, which commence in 2020, but they indicate material shortcomings in operational risk management, which were not aligned with the assessmentFitch had previously incorporated into its ratings. This resulted in a downward revision to our score for management and strategy and a negative outlook on earnings and profitability.

APRA’s findings indicated deficiencies within ANZ’s management of operational and compliance risks, culture and governance. APRA noted it will be increasing ANZ’s minimum capital requirements by AUD500 million from 30 September 2019, which will remain in place until the bank has completed its planned remediation and closed the gaps identified in the self-assessment.

Fitch believes ANZ continues to have robust risk and reporting controls around other risks, including credit, market and liquidity risk, as reflected by its conservative underwriting standards and very high degree of asset-quality stability.

Details on other rating drivers can be found in the Rating Action Commentary “Fitch Revises NAB’s Outlook to Negative, Affirms Australia’s Four Major Banks”, published 14 February 2019.

SUPPORT RATING AND SUPPORT RATING FLOOR
ANZ’s Support Rating and Support Rating Floor reflect its systemic importance, highlighted by its market share and potential for contagion risk in a stressed environment. As a result, there is an extremely high probability of support from Australian authorities, if needed. The current regulatory proposal for loss-absorbing capital has not affected this view, as it does not allow for a senior bail-in instrument; the additional requirement would be met through existing Tier 2 capital instruments.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The ratings on ANZ’s Tier 2 subordinated debt, both legacy and Basel III compliant instruments, are notched down one level from the Viability Rating for loss severity. No notching has been applied for non-performance risk.

Tier 1 hybrid capital instruments are notched down five levels from ANZ’s Viability Rating – two notches to reflect loss severity and three notches to reflect non-performance risk.

SUBSIDIARY AND AFFILIATED COMPANY
The Outlook on ANZNZ’s Long-Term Foreign-Currency and Local-Currency IDRs are aligned with ANZ’s to reflectFitch‘s view that there continues to be an extremely high likelihood of support from the parent, if required. ANZNZ is a highly integrated and integral part of ANZ’s business. The possibility of support is reinforced by strong regulatory linkages between Australia and New Zealand banking authorities.

The ratings of senior unsecured debt issued by ANZ New Zealand (Int’l) Limited are aligned with ANZNZ’s Long-Term IDR as ANZNZ guarantees the debt instruments.

RATING SENSITIVITIES

VIABILITY RATING, IDRS AND SENIOR UNSECURED DEBT
The Viability Rating and IDRs of ANZ may be downgraded if its management team fails to prevent the risks from the remediation of operational and compliance risk shortcomings from spilling over into its ongoing businesses. This is most likely to manifest in weakening earnings relative to peers. Ratings are also likely to come under pressure if shortcomings are identified in other risk controls, such as credit and market risk.

Conversely, ANZ’s Outlook may be revised to Stable if the governance of operational and compliance risks can be strengthened in line with regulatory expectations without a substantial negative impact on the ongoing businesses and earnings.

SUPPORT RATING AND SUPPORT RATING FLOOR
A weakening in the propensity for the authorities to provide support may result in Fitch lowering the Support Ratings and Support Rating Floors of the major banks. A change in the ability of authorities to provide support, which is likely to be reflected in a downgrade of Australia’s sovereign rating (AAA/Stable), may also result in a downgrade of the banks’ Support Ratings and Support Rating Floors. However, this would not directly affect the banks’ IDRs, which are driven by their Viability Ratings.

VIABILITY RATING, IDRS AND SENIOR UNSECURED DEBT
The revision of our Outlook to Negative reflects the risk that WBC’s focus on remediating operational and compliance risks as well as cultural issues may result in resources being diverted from ongoing operations, which could lead to a weakening of WBC’s earnings relative to peers. The affirmation of WBC’s ratings reflects Fitch‘s expectation that despite these challenges, the bank will maintain its strong company profile in the short term, which in turn supports its sound financial profile.

The Australian Prudential Regulation Authority’s (APRA) announcement on 11 July 2019 that it was applying additional operational risk capital requirements on WBC, in response to the bank’s self-assessment on governance, accountability and culture, is the main driver of Fitch‘s rating action. The additional capital requirements should remain manageable and not impair the bank’s ability to meet APRA’s ‘unquestionably strong’ targets starting in 2020, but it indicates material shortcomings in operational risk management, which were not aligned to what Fitch had previously incorporated into its ratings. This has resulted in a downward revision to our score for management and strategy and weaker outlook on earnings and profitability.

APRA’s findings indicated deficiencies within WBC’s management of operational and compliance risks, as well as culture and governance. APRA said it will increase WBC’s minimum capital requirements by AUD500 million from 30 September 2019. The increase will remain in place until the bank has completed its planned remediation and closed the gaps identified in the self-assessment.

Fitch believes WBC continues to have robust risk and reporting controls around other risks, including credit, market and liquidity risks, as reflected by its conservative underwriting standards and high degree of asset-quality stability. More detail on other rating drivers is in the rating action commentary, “Fitch Revises NAB’s Outlook to Negative, Affirms Australia’s Four Major Banks”, published 14 February 2019.

SUPPORT RATING AND SUPPORT RATING FLOOR
WBC’s Support Rating and Support Rating Floor reflect its systemic importance, as highlighted by its market share and potential for contagion risk in a stressed environment. As a result, there is an extremely high probability of support from Australian authorities, if needed. The current proposal for loss-absorbing capital has not affected this view, as it does not allow for a senior bail-in instrument; the additional requirement would be met through existing Tier 2 capital instruments.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The ratings on WBC’s Tier 2 subordinated debt, both legacy and Basel III compliant instruments, are notched down one level from the Viability Rating for loss severity. No notching has been applied for non-performance risk.

Tier 1 hybrid capital instruments are notched down five levels from WBC’s Viability Rating – two notches to reflect loss severity and three notches to reflect non-performance risk.

SUBSIDIARY AND AFFILIATED COMPANIES
Our Outlook on WNZL’s Long-Term Foreign-Currency and Local-Currency IDRs are aligned with WBC’s to reflect Fitch‘s assessment that there continues to be an extremely high likelihood of support from the parent, if required. WNZL is a highly integrated and integral part of WBC’s business. The possibility of support is reinforced by strong regulatory linkages between Australia and New Zealand banking authorities.

The ratings of senior unsecured debt issued by Westpac Securities NZ are aligned with WNZL’s Long-Term IDR, as WNZL guarantees the debt instruments.

RATING SENSITIVITIES

VIABILITY RATING, IDRS AND SENIOR UNSECURED DEBT
The Viability Rating and IDRs of WBC may be downgraded if the bank fails to prevent the risks from the remediation of operational and compliance shortcomings spilling over into its ongoing business. This is most likely to manifest in weaker earnings relative to peers. Ratings are also likely to come under pressure if shortcomings are identified in other risk controls, such as credit and market risks.

Conversely, our Outlook on WBC may be revised to Stable if the governance of operational and compliance risks can be strengthened in line with regulatory expectations without a substantial impact on the ongoing businesses and earnings.

SUPPORT RATING AND SUPPORT RATING FLOOR
A weakening in the propensity for the authorities to provide support may result in Fitch lowering the Support Ratings and Support Rating Floors of the major banks. A change in the ability of authorities to provide support, which is likely to be reflected in a downgrade of Australia’s sovereign rating (AAA/Stable), may also result in a downgrade of the banks’ Support Ratings and Support Rating Floors. However, this would not directly affect the banks’ IDRs, which are driven by their Viability Ratings.

Basically downgraded for dodginess.