DBRS Ratings Limited (DBRS Morningstar) confirmed the ratings of Westpac Banking Corporation (Westpac or the Group), including the Long-Term Issuer Rating at AA and the Short-Term Issuer Rating at R-1 (high). The trend on the Group’s ratings changed to Stable from Negative. The Intrinsic Assessment (IA) of the Group is AA (low) and the Support Assessment is SA2, which reflects the generally supportive regulatory framework and DBRS Morningstar’s expectation of timely systemic support, given Westpac’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 RATING CONSIDERATIONS
The confirmation of the ratings reflects the strength and scale of Westpac’s franchise in its core markets of Australia and New Zealand, the strong capital levels, and the well-managed funding and liquidity profile with much lower reliance on wholesale funding in recent years.
The return to a Stable trend reflects that Westpac has demonstrated a well-contained financial and reputational impact from the operational risk issues faced over the past years. DBRS Morningstar considers that Westpac has made important progress in addressing its risk shortcomings. In addition, the Group’s capacity to generate earnings remains solid. Although profitability is lower than historical levels, it still compares well with similarly rated international peers.
Given its already high rating level, an upgrade of the long-term ratings is unlikely. However, over the longer-term, evidence that the Group has fully resolved its past misconduct issues, proved that its earnings remain resilient, while showing a longer track record of lower reliance on wholesale funding, and it has maintained very strong capital levels, would lead to an upgrade of the ratings.
The ratings would be downgraded if Westpac experiences a material deterioration in asset quality combined with low returns, and/or any evidence that the Group has failed to rectify past operational risk issues. Furthermore, a downgrade of the long-term ratings would occur if DBRS Morningstar viewed the likelihood of timely systemic support as reduced.
Franchise Combined Building Block (BB) Assessment: Very Strong/Strong
Westpac has strong market shares in retail banking in Australia (including 22% in household mortgages), and this is complemented by a solid retail market position in New Zealand. DBRS Morningstar considers that Westpac's franchise has remained solid despite the misconduct issues. In DBRS Morningstar’s view, Westpac has taken important and necessary actions at the governance level to identify and remediate the causes of its operational risks failures, including an extensive overhaul of Westpac's top management.
Earnings Combined Building Block (BB) Assessment: Strong/Good
The Group has consistently generated strong profits, albeit lower in recent years due to increased operating costs. Westpac reported statutory net profit attributable to owners of AUD 5.4 billion in FY21, up 138% from AUD 2.3 billion in FY20 largely reflecting impairment provision releases due to the improved macroeconomic outlook and credit quality metrics. Westpac reported credit impairment releases of AUD 590 million in FY21 in contrast to credit charges of AUD 3,178 million in FY20, representing a cost of risk (as a proportion of annualised average loans) of -8 bps in FY21, compared to 45 bps in FY20 and 11 bps in FY19. Net interest income, which is the main contributor to operating income, amounted to AUD 16,858 million in FY21, up 1% from AUD 16,696 million in FY20, mainly due to growth in new mortgage lending FY21. The net interest margin (NIM) was 2.06% in FY21, up from 2.03% in FY20.
The main financial impact from governance deficiencies has materialised through additional, generally non-recurrent, costs incurred by remediation and the refocus on core businesses (such as penalties, redress costs, or goodwill impairments). Our expectation is that efficiency levels will improve to levels closer to Westpac’s historical performance over time as the Group expects to incur lower large notable items in FY22-FY24. The Group reported a cost-to-income ratio of 62.7% in FY21 compared to 63.1% in FY20, much higher than the 48.9% reported in FY19, however, excluding large non-recurrent items, Westpac’s cost-to-income ratio was more in line with historical levels at 53.8% in FY21 and 49.5% in FY20.
Risk Combined Building Block (BB) Assessment: Strong/Good
Asset quality remains solid. The Group’s gross impaired loans plus loans over 90+ days past due (DPD) to total loans decreased to 1.37% at end-FY21 from 1.62% at end-FY20, but this is still above the 0.95% at the end of FY19, reflecting the more challenging environment triggered by the pandemic in the Business division (property, hospitality, retail trade, and agriculture). Westpac initially provided AUD 55 billion (12% of the portfolio) in mortgage deferrals to 149,000 customers, and AUD 10 billion in business deferrals to 33,000 customers in 2020, however, the majority of the customers resumed payments during FY20 and FY21. The overall quality of the Australian home loans portfolio remained strong with a loss rate of just 0.03% in FY21 and the impaired home loans plus the 90+ DPD ratio at 0.99% of total gross exposures.
DBRS Morningstar considers Westpac has made important progress in addressing its risk shortcomings, however, addressing non-financial risks remains an important priority. In FY21, the issues raised by AUSTRAC in relation to financial crimes have all been addressed, and APRA closed its investigation into Westpac’s anti-money laundering breaches in March 2021. DBRS Morningstar will, however, continue to closely monitor Westpac’s progress in further strengthening its operational risk governance framework to APRA’s satisfaction.
Funding and Liquidity Combined Building Block (BB) Assessment: Strong/Good
DBRS Morningstar views Westpac’s funding profile as having improved in recent years. The Group’s net loan-to deposit ratio was 113% at end-FY21, down from 117% at end-FY20, and 127% level at end-FY19. The improvement was largely due to a significant rise in customer deposits throughout the pandemic. The Group has relatively good diversification in its wholesale funding profile in terms of product and currency, as well as no significant refinancing concentration. Liquidity has generally been ample and Westpac’s Liquidity Coverage Ratio was 129% at end-FY21 while the Group’s Net Stable Funding Ratio was 125% at end-FY21.
Capitalisation Combined Building Block (BB) Assessment: Strong
Westpac’s capitalisation levels are strong, supported by resilient earnings generation ability, large cushions over regulatory minimums, and good access to capital markets. In FY21, the Group’s capital levels further improved with APRA CET 1 ratio at 12.3% , up from 11.1% at end-FY20. This is well above the minimum requirement of 8% and the “unquestionably strong” benchmark of 10.5% set in 2017 by APRA. On an internationally comparable basis, Westpac reported a CET1 ratio of 18.2% at-end FY21, up from 16.5% at end-FY20, and a leverage ratio of 6.6%, according to the Group’s calculations.
Further details on the Scorecard Indicators and Building Block Assessments can be found at: https://www.dbrsmorningstar.com/research/388579
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
All figures are in AUD unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (19 July 2021) https://www.dbrsmorningstar.com/research/381742/global-methodology-for-rating-banks-and-banking-organisations Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021) https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings
The sources of information used for this rating include Westpac Annual Report FY2021, Westpac Investor Presentation FY2021, Westpac FY2021 Full Year Financial Results, Westpac Media Release FY2021, Westpac ESG Market Update 21 September 2021, Australian Prudential Regulatory Authority and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.
With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was 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
DBRS Morningstar 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 12-month period. DBRS Morningstar's outlooks and ratings are under regular surveillance.
For further information on DBRS Morningstar 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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.
The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/388578
This rating is endorsed by DBRS Ratings GmbH for use in the European Union.
Lead Analyst: Vitaline Yeterian, Senior Vice President, Global FIG
Rating Committee Chair: Ross Abercromby, Managing Director, Global FIG
Initial Rating Date: 02/01/2005
Last Rating Date: 11/26/2020
DBRS Ratings Limited
20 Fenchurch Street, 31st Floor, London EC3M 3BY United Kingdom
Tel. +44 (0) 20 7855 6600
Registered and incorporated under the laws of England and Wales: Company No. 7139960
For more information on this credit or on this industry, visit www.dbrsmorningstar.com.