DBRS Ratings Limited (DBRS Morningstar) upgraded the Long-Term ratings of Commonwealth Bank of Australia (CBA or the Bank), including the Long-Term Issuer Rating to AA (high). The Short-Term Issuer Rating was confirmed at R-1 (high). The trend on the Long-Term ratings has been changed to Stable from Positive, and the trend for the Short-Term ratings remains Stable. The Intrinsic Assessment (IA) of the Bank is now AA and the Support Assessment is SA2, which reflects the generally supportive regulatory framework and DBRS Morningstar’s expectation of timely systemic support, given CBA’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 upgrade of the long-term ratings recognises CBA’s leading and diversified franchise in its home market of Australia, where the bank is the leading banking institution, particularly in Retail banking, as well as the Bank’s robust earnings generation ability and solid capital levels. CBA has demonstrated a strong financial performance through-the-cycle and a conservative risk profile with very low levels of loan losses and impaired loans. The ratings also consider that the Bank’s funding mix has significantly improved over recent years, supported by strong growth of customer deposits and lower reliance on wholesale funding.
In DBRS Morningstar’s view, CBA’s strong capital and robust earnings generation positions the Bank well to cope with the challenging economic environment that includes higher interest rates and high inflation, and which could lead to a manageable deterioration in asset quality and higher provisioning.
Given CBA’s recent Long-Term rating upgrade and high rating level, a further upgrade is unlikely.
A downgrade of the ratings would require a prolonged material deterioration in profitability, asset quality, or capital levels. Furthermore, a downgrade of the long-term ratings would occur if, in DBRS Morningstar’s opinion, the likelihood of timely systemic support were reduced.
Franchise Combined Building Block (BB) Assessment: Very Strong
CBA is a leading Australian bank with total assets of AUD 1,215 billion at end-June 2022 (end-FY22). CBA is the leading bank in Australia for Retail Banking and the Bank also has a meaningful franchise in New Zealand. CBA has significant market shares of 25.8% in home lending and 27.5% in household deposits. Over the past few years, the Bank has focused on retail and commercial businesses in Australia and New Zealand and has completed several divestments of non-core assets, the latest one being the sale of a 10% shareholding in Bank of Hangzhou (HZB).
Earnings Combined Building Block (BB) Assessment: Strong
CBA has consistently generated strong earnings supported by its large and diversified retail and commercial business franchise in its home market of Australia and this has been a key consideration for the upgrade. The Bank’s performance remained resilient through the recent COVID-19 pandemic. On a statutory basis, the Bank reported net profit after tax of AUD 10,771 million in FY22, up 6% year-on-year (YoY), largely supported by net interest income (NII) growth, on the back of lending volume growth in core businesses and disciplined operating expenses. FY22 results also benefitted from reversals of loan loss provisions related to COVID-19 and capital gains from the sale of HZB. NII is the largest contributor to operating income, accounting for 78% of the total in FY22. CBA reported a return on equity (ROE) of 12.8% on a continuing operations basis in FY22, up from 11.8% in FY21. The Bank’s ROE compares favorably with most international peers.
Risk Combined Building Block (BB) Assessment: Very Strong / Strong
CBA has a conservative credit profile and strong asset quality, with low levels of impaired assets which have remained resilient during various economic cycles, including the recent global pandemic. At end-FY22, the Stage 3 loans totaled AUD 7.2 billion, representing 0.82% of total gross loans, an improvement from 0.92% at end-FY21 and lower than pre-pandemic levels of 0.86% at end-FY20. Moreover, the Bank’s Stage 2 loans, which are loans that have been classified as having experienced a significant increase in credit risk but are not impaired, represented 13% of total gross loans at end-FY22. Whilst the Bank’s exposure to the commercial property sector accounted for a manageable 6.5% of total credit exposures at end-FY22, the portfolio appears well diversified by assets. This portfolio has not shown a major deterioration and the ratio of troublesome and impaired assets was 0.66% at end-FY22, broadly stable from the year before.
DBRS Morningstar also considers CBA’s operational risk shortcomings to be largely behind the Bank, as the Bank has made significant progress in rectifying the weaknesses flagged by APRA and the Royal Commission in 2018. This is also a key consideration for the upgrade, as evidenced by significantly lower remediation costs in FY22 compared to previous years and the recent removal of the AUD 500 million capital add-on on 30th September 2022.
Funding and Liquidity Combined Building Block (BB) Assessment: Strong / Good
CBA’s funding profile is well-managed and has improved over the years, supported by consistent growth of customer deposits and reduced reliance on wholesale funding. The Bank’s net loan-to-deposit ratio stood at 107% at end-FY22. Wholesale funding (excluding certificates of deposits), which was very high in the past, accounted for 20.7% of total funding at end-FY22, down from 25.4% at end-FY19. CBA's liquidity remains sound, and CBA’s LCR was 130% at end-FY22.
Capitalisation Combined Building Block (BB) Assessment: Very Strong / Strong
DBRS Morningstar views CBA as having a very robust capital position, supported by a solid track record in internal capital generation and good access to capital markets. As a result DBRS Morningstar considers the Bank is well-placed to continue to address the evolving regulatory environment, including the new regulatory capital requirements set from 1st January 2023. The Bank reported an APRA Common Equity Tier 1 (CET1) ratio of 11.5% at end-FY22, down from 13.1% at end-FY21, with the decrease mainly driven by share buybacks, dividend payments and higher RWAs due to increased interest rate risk in the banking book resulting from higher interest rates. The CET1 ratio is still comfortably above APRA’s “unquestionably strong benchmark” of 10.5%. On an “internationally comparable” basis, CBA reported a strong CET1 ratio of 18.6% and leverage ratio of 5.9% at end-June 2022.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/404228
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/ Social/ Governance factors that had a significant or relevant effect on the credit analysis
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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings. (May 17, 2022)
All figures are in AUD unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations https://www.dbrsmorningstar.com/research/398692/global-methodology-for-rating-banks-and-banking-organisations (June 23, 2022). In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings, https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022) in its consideration of ESG factors.
The sources of information used for this rating include Morningstar Inc. and Company Documents, Commonwealth Bank of Australia (CBA) 2022 Annual Report, CBA Profit Announcement for the full year ended 30 June 2022, CBA Results Presentation and Investor Discussion Pack FY2022, CBA Fixed Income Investor Discussion Pack FY2022, CBA 2022 Climate Report. 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.
The conditions that lead to the assignment of a Negative or Positive trend are generally 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: https://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/404230
This rating is endorsed by DBRS Ratings GmbH for use in the European Union.
Lead Analyst: Maria Rivas, Senior Vice President, Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of European FIG - Global FIG
Initial Rating Date: 24/01/2005
Last Rating Date: 22/10/2021
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