DBRS Ratings Limited (DBRS Morningstar) confirmed the ratings of Australia and New Zealand Banking Group Limited (ANZ or the Group), including the Long-Term Issuer Rating at AA and the Short-Term Issuer Rating at R-1 (high). The trend on all ratings is Stable. 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 ANZ’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 ANZ’s strong franchises in Australia and New Zealand, both in retail and institutional banking, as well as the solid earnings generation in the more challenged environment, including lower interest rates. ANZ’s credit quality remains very strong. DBRS Morningstar also views that ANZ has a robust capital position and a well-managed funding and liquidity profile, with a reduced reliance on wholesale funding reflecting deposit growth in recent years.
An upgrade of the long-term ratings would require the Group to improve profitability metrics while maintaining a resilient credit profile, sustained low reliance on wholesale funds and robust capital levels.
The ratings would be downgraded if ANZ experiences a substantial deterioration of its asset quality profile, combined with lower returns. Furthermore, a downgrade of the Long-Term Issuer Rating could occur if, in DBRS Morningstar’s opinion, the likelihood of timely systemic support were reduced.
Franchise Combined Building Block (BB) Assessment: Very Strong/Strong
ANZ is a leading Australian bank with a strong franchise in its core markets of Australia and New Zealand, both in retail and institutional banking. In the past few years, ANZ has streamlined its offering both domestically and internationally. The Group has disposed of businesses, including Wealth Australia, and minority stakes in other banks in Asia, with the simplification process nearing completion. This reflects the management's strategy to re-focus towards strengthening its core businesses.
Earnings Combined Building Block (BB) Assessment: Strong/Good
The Group reported statutory net profit attributable to shareholders of AUD 6,162 million in FY21, up 72% compared to FY20 (AUD 3,577 million), largely reflecting credit impairment releases. Due to an improved macroeconomic outlook and improvements in the portfolio mix from all divisions, ANZ reported credit impairment releases of AUD 567 million in FY21 compared to credit impairment charges of AUD 2,738 million in FY20. At the same time, net interest income, which is the key revenue driver, was up 1% to AUD 14,161 million in FY21 vs. FY20 mainly due to lending growth. The net interest margin (NIM) for FY21 was 1.64%, compared to 1.63% in FY20, but below the 1.75% in FY19. In this context, efficiency levels remained very good with a cost-to-income ratio of 52.3% in FY21, down from 54.5% in FY20. The improvement was also driven by lower operating costs on a statutory basis, which were down by 4% to AUD 9,051 million driven by decreases in technology and fixed asset spending and lower remediation costs.
Risk Combined Building Block (BB) Assessment: Strong
ANZ’s asset quality remains robust. ANZ’s gross impaired loans ratio decreased to 0.8% at end-FY21 from 1.0% at end-FY20, as calculated by DBRS Morningstar. This includes impaired loans and 90+ days past due loans & restructured (DPD) loans. The loan book consists predominantly of mortgages where the loss rate level was just three basis points in FY21. The Group’s corporate portfolio appears well-diversified by sector and geographically weighted towards Australia and New Zealand. ANZ has less than 0.5% of loans remaining under a payment deferral program put in place due to COVID-19, which is significantly down compared to last year when around 4% of the accounts were under payment deferrals at October 15, 2020.
DBRS Morningstar considers that ANZ has made important progress in addressing its risk shortcomings, however, addressing non-financial risks remains an important priority, and DBRS Morningstar will continue to closely monitor ANZ’s progress in further strengthening its operational risk governance framework to the Australian Prudential Regulation Authority’s (APRA) satisfaction.
Funding and Liquidity Combined Building Block (BB) Assessment: Strong/Good
DBRS Morningstar views ANZ’s funding profile as improved in recent years, reflecting that growth in customer deposits has outpaced the moderate loan growth. As such, the Group’s net loan-to deposit ratio improved to 100% at end-FY21 from 106% at end-FY20, as per DBRS Morningstar calculations including certificates of deposits. Wholesale funding accounted for 25% of total funding at end-FY21 with about 11% of total wholesale funds being commercial paper. DBRS Morningstar views the Group’s wholesale funding profile as well diversified in terms of product and currency with no significant refinancing concentration. ANZ has a solid liquidity position with the Group's average Liquidity Coverage Ratio (LCR) ratio at 136% at end-FY21 (vs. 139% at end-FY20), while its Net Stable Funding Ratio (NSFR) ratio was 124% (stable YoY).
Capitalisation Combined Building Block (BB) Assessment: Strong
DBRS Morningstar views ANZ as having a robust capital position, given the Group’s solid track record in generating earnings, and its ability to access markets. The Group reported an APRA Common Equity Tier 1 (CET1) ratio of 12.34% at end-FY21 (up from 11.34% at end-FY20). This is well above the minimum requirement of 8% and APRA’s requested “unquestionably strong” benchmark of 10.5%. On an internationally comparable basis, ANZ’s CET1 ratio also increased, to a high 18.30%, from 16.7%, and its leverage ratio was 6.1% at end-FY21 which compared well with international and most domestic peers.
Further details on the Scorecard Indicators and Building Block Assessments can be found at: Ratings at https://www.dbrsmorningstar.com/research/388817
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 Organisaitons (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 Australia Prudential Regulation Authority, ANZ FY21 Financial Report, ANZ FY21 Consolidated Financial Report, ANZ FY21 Debt Investor Presentation, ANZ FY21 Investor Discussion Pack, ANZ FY21 Data sheet 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/388815
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: 01/25/2005
Last Rating Date: 11/27/2020
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