DBRS Confirms ANZ at AA / R-1 (high) with a Stable Trend

DBRS Ratings Limited (DBRS) has confirmed the ratings of Australia and New Zealand Bank Group Limited (ANZ or the Group) including the AA Long-Term Issuer Rating and Long-Term Senior Debt rating. The trend on all ratings is Stable. ANZ’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 ANZ to the financial system in Australia, and the generally supportive regulatory framework.

KEY RATING CONSIDERATIONS
The confirmation of the ratings reflects the Group’s strong franchise in Australia and New Zealand as well as the strong revenue generation ability, the low risk profile, the sound capitalisation and improving funding and liquidity profile.

RATING DRIVERS
Any upward pressure would require (i) a reduction in the extent of the reliance on wholesale funding, (ii) whilst addressing regulatory issues, and (iii) maintaining solid recurring earnings as well as continued sound capital management.

Downward pressure on the ratings would be likely (i) if the Group’s reliance on wholesale funding were to increase materially, or (ii) if the Group had larger than expected conduct issues or fines. (iii) Additionally, negative pressure could also arise if the Group’s asset quality metrics were to significantly deteriorate potentially due to a significant stress in property market.

RATING RATIONALE
In recent years, ANZ has consistently generated strong revenues supported by its strong positions in its core markets of Australia and New Zealand. Statutory profit after tax attributable to shareholders in FY18 totalled AUD 6,400 million, flat on FY17 while profit before tax stood at AUD 9,895 million, or 7% higher compared to the previous year. This primarily reflected increased operating income, mainly due to the sale of assets, and reduced credit impairment charges, as a result of both lower new entries and write-backs, that outweighed elevated operating expenses. However, on a cash profit basis, which excludes non-core items, cash profit from continuing operations in FY18 reduced by 5% year-on-year to AUD 6,487 million as a decrease in revenues and elevated operating expenses were only partially offset by reduced credit impairment charges. DBRS notes operating expenses (both in statutory and cash basis) totalled AUD 9,248 million in FY18, or 3% higher than in FY17, as a result of an accelerated software amortization charge, remediation charges including the continuing and discontinuing operations, as well as restructuring costs and Royal Commission legal costs. On a cash basis, the Group’s cost-to-income ratio was up to 51.6% in FY18, compared to 46.1% in FY17.

DBRS considers ANZ’s credit performance as solid, given the historically low cost of risk. Overall, the performance of the loan portfolio is good, with gross impaired loans plus loans over 90+ days past due (DPD) accounting for 0.86% of the total loan portfolio at end-FY18, marginally up from 0.84% at end-FY17. At the same time, the Group’s largest exposure remains towards residential mortgages, which accounted for AUD 346 billion at end-FY18, or 56.9% of the total gross loans and advances. DBRS notes the Australian housing market has slowed down in 2018, in particular in Sydney and Melbourne. However, DBRS views ANZ as well positioned to absorb a deterioration given that the Group’s dynamic loan-to-value ratio (LVR) stood at 54% in Australia (and 41% in New Zealand). DBRS also notes that in the Australian mortgage portfolio, 72% of the customers were ahead of their repayment schedule at end-FY18. This provides a buffer in case of a significant correction in house prices. Overall, the quality of the home loans portfolio remains very strong with a loss rate of 0.07%.

Operational risk control and risk management have been apparent in the last months. ANZ, along with the other major Australian banks, is part of the Royal Commission in the banking, superannuation and financial services industry that was initiated in December 2017 and will produce its final report in February 2019. To date, the financial implications for ANZ have been small, and the potential consequences of reputational damage remains unclear. DBRS will continue to monitor this area closely.

DBRS considers that ANZ’ funding profile has been gradually improving. Strong growth in customer deposits has helped reduce the (DBRS calculated) net loan-to-deposit ratio to 124% at end-FY17 from 131% at end-FY13. Similar to its major Australian peers, though, the Group relies to a higher degree than most of its global peers on the wholesale market, as total wholesale funding remains sizeable at AUD 267.7 billion, accounting for 32.5% of total funding at end-FY18. DBRS views that this is partially mitigated by the improving liquidity position, with average liquid assets of AUD 194.1 billion in FY18, which compares to net cash outflows of AUD 136 billion at end-FY18. As a result, the Group reported an average LCR of 142% at end-FY18, up from 134% at end-1H18. The Group’s Net Stable Funding Ratio (NSFR) stood at 114.6% at end-FY18, which is above the minimum 100% requirement (mandatory since 1 January 2018).

DBRS considers ANZ’s capital position to be robust. The Group reported an APRA Common Equity Tier 1 (CET1) ratio of 11.4% at end-FY18, up from 11.0% at end-1H18 and 10.6% at end-FY17, with the increase reflecting mainly organic capital generation and the divestments of assets. This is well above APRA’s benchmark of 10.5% based on the current capital framework. In addition, on a pro-forma basis, i.e. including impact of divestments expected to be finalised within the calendar year FY19, ANZ had a CET1 ratio of 11.8% at end-FY18. And the Group’s leverage ratio, calculated on an APRA basis as Tier 1 Capital as a percentage of total exposure, was 5.5% at end-FY18, up from 5.4% at end-FY17.

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

Notes:
All figures are in AUD unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (July 2018). This 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

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

Lead Analyst: Vitaline Yeterian, Vice President – Global FIG
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer - Global FIG and Sovereign Ratings
Initial Rating Date: January 25, 2005
Last Rating Date: November 30, 2017

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