DBRS Confirms Commonwealth Bank at AA / R-1 (high); Trend Remains Stable

DBRS Ratings Limited (DBRS) has confirmed the ratings of Commonwealth Bank of Australia (CBA or the Bank) including the AA Long-Term Issuer Rating and Long-Term Senior Debt rating. The trend on all ratings is Stable. CBA’s ratings reflect an intrinsic assessment (IA) of AA (low), combined with a support assessment of SA2, which results in a one notch uplift to the final rating from the IA. The SA2 reflects the systemic importance of CBA to the financial system in Australia, and the generally supportive regulatory framework. Concurrently, DBRS discontinued the AAA rating on the Bank’s Long Term Debt Australian Government Guaranteed as it has been repaid.

The confirmation of the ratings reflect the Bank’s extremely strong domestic franchise, as well as the Bank’s very strong profitability, conservative risk profile, robust capital levels, and improving funding and liquidity profile.

CBA’s ability to consistently achieve strong profitability is a key factor in the high IA. In FY17, CBA reported a statutory net profit of AUD 9,928 million, up 8% year-on-year (YoY), reflecting solid revenue growth and improved performance across most business divisions. Additionally, although the Bank’s operating expenses increased by 6% on a cash basis to AUD 11.1 billion in FY17, driven by the one-off impact of accelerated software amortisation of AUD 393 million and increased staff costs, cost control remains solid with a cost-income ratio of 42.7% on a cash basis.

In DBRS’s opinion, CBA maintains a conservative risk profile as evidenced by the good quality loan book, the diversification by industry and the low cost of risk. Credit quality remains very strong, with total impaired loans as a percentage of gross loans remaining relatively flat YoY at 0.41% at end-FY17, with the coverage of impaired loans at 121%. Even including loans 90+ days past due (DPD) but not impaired, the Bank’s problem loans as a percentage of gross loans is still very low at 0.78% at end-FY17.

DBRS will, however, continue to closely follow the developments on the Australian Transaction Reports and Analysis Centre (AUSTRAC) civil penalty claim against CBA with regards to 53,000 potential breaches of anti-money laundering and counter-terrorism laws. These relate to threshold transaction reports that were lodged late and each of these breaches could carry a penalty of up to AUD 18 million, although CBA believes these could be considered as a single conduct event as they originated from a single systems error. As a result of this, APRA has announced an independent prudential inquiry into CBA, with particular focus on the Bank’s governance, culture and accountability frameworks. DBRS notes that negative rating pressure could arise if these issues reveal other control issues, or lead to fines substantially above expectations.

CBA’s funding position has improved significantly in recent years, as strong customer deposit growth has helped to reduce the Bank’s (DBRS calculated) net loan to deposit ratio to 131% at end-FY17, from 142% at end-FY12. The Bank, however, in line with other major Australian banks, continues to rely on wholesale funding, which accounted for 32% of total funding at end-FY17. Although DBRS views positively the diversified mix of funding sources, the high level of wholesale funding continues to leave the Bank potentially exposed to more volatile wholesale markets, however DBRS notes that CBA’s liquidity profile also substantially strengthened in FY17, with a 24% YoY increase in high quality liquid assets (HQLA), to AUD 93.4 billion. At FY17 the Bank reported a liquidity coverage ratio (LCR) of 129%, up 9 percentage points YoY and a Net Stable Funding Ratio (NSFR) of 107% at end-FY17.

CBA’s capital position remains robust, with the Bank reporting an APRA Basel 3 Common Equity Tier 1 (CET1) ratio of 10.1% at end-FY17. This was down 50 basis points (bps) from end-FY16, as cash earnings were more than offset by changes to the risk-weighted assets (RWA) calculation for the Bank’s Australian residential mortgage portfolio. The Bank’s leverage ratio, calculated on an APRA basis as Tier 1 capital % of Total Exposure, was 5.1% at end-June 2017. On an internationally comparable basis, CBA reported a CET1 ratio of 15.6%, and a leverage ratio of 5.8% at end-June 2017.

RATING DRIVERS
Upward pressure would require continued progress in improving the funding profile and resolving the current legal issues, whilst maintaining low levels of credit losses, solid and predictable earnings and continued sound capital management.

Downward pressure on the ratings would be likely if the proportion of wholesale funding, especially short-term wholesale funding, were to increase, or if the Bank’s asset quality were to deteriorate substantially. Additionally, negative rating pressure could arise if these issues reveal other control issues, or lead to fines substantially above expectations.

The Grid Summary Grades for CBA are as follows: Franchise Strength – Very Strong/Strong; Earnings Power – Very Strong; Risk Profile – Strong; Funding & Liquidity – Strong/Good; Capitalisation – Very Strong.

Notes:
All figures are in AUD unless otherwise noted.

The principal applicable methodologies are the Global Methodology for Rating Banks and Banking Organisations (May 2017) and DBRS Criteria: Guarantees and Other Forms of Support (February 2017). These can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include SNL Financial, company documents, the Reserve Bank of Australia, the Australian Prudential Regulation Authority and the Reserve Bank of New Zealand. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

This is an unsolicited rating. This credit rating was not initiated at the request of the issuer.

This rating included participation by the rated entity or any related third party. DBRS had no access to relevant internal documents for the rated entity or a related third party.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU and US regulations only.

Lead Analyst: Ross Abercromby, Senior Vice President - Global FIG
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer - Global FIG and Sovereign Ratings
Initial Rating Date: January 24, 2005
Last Rating Date: July 14, 2017

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