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 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 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 Westpac’s strong franchise in its core markets of Australia and New Zealand as well as Westpac’s conservative risk profile and sound asset quality with low levels of impaired loans. The ratings also take into account the Group’s sound earnings generation, which have been recently supported by higher net interest income and reduced costs, as well as the significant progress made by the Group in addressing past operational risk shortcomings in the last two years. However, the ratings also take into account Westpac’s large usage of wholesale funding, accounting for around 24% of total funding at end-FY22. Moreover, Westpac’s profitability is improving but remains weaker than domestic peers.
Given its already high rating level, an upgrade of the long-term ratings is unlikely. However, over the longer-term, an upgrade of the ratings would require a sustained improvement in earnings generation and a lower reliance on wholesale funding, along with maintaining sound asset quality and capital levels.
A downgrade of the ratings could be driven by a prolonged material deterioration in asset quality, additional risk shortcomings, and/or a failure to satisfactorily resolve its past misconduct issues. Furthermore, a downgrade of the 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 is one of the major leading banks in Australia with total assets of AUD 1,014.2 billion at end-September 2022. The Group has a strong retail franchise in Australia, where it has leading market shares of 20% in household deposits and 21% in household mortgages. In New Zealand, Westpac has an 18% market share in both deposits and consumer lending. In recent years, the Group has conducted a significant business and management overhaul, including the sale of non-core businesses, which has been largely completed by end-FY22.
Earnings Combined Building Block (BB) Assessment: Good
Westpac’s earnings generation has improved over the last two years, supported by lower operating expenses and low levels of loan loss provisions. The Group reported statutory net profit attributable to owners of AUD 5.7 billion in FY22, up 4% from AUD 5.4 billion in FY21. The Group, however, reported lower revenues year-on-year (YoY) reflecting the divestments, a one-off loss of AUD 1.1 billion from the sale of Life Insurance Services Limited and lower trading income driven by a negative derivative valuation adjustment. However, net interest income (NII) was up 2% YoY to AUD 17.2 billion, largely benefitting from some new lending growth and higher fair value gains on hedges. Loan loss provisions were AUD 335 million compared with significant loan loss releases the year before of AUD 590 million. Operating expenses, on a statutory basis, totalled AUD 10.8 billion, down 19% YoY, largely driven by the various cost reduction initiatives. As a result, the Group's cost-income ratio improved to 55% in FY22, down from around 63% in FY21 and FY20, although still higher than the 49% in FY19.
Risk Combined Building Block (BB) Assessment: Strong/Good
Westpac's credit risk profile is conservative as reflected in the Group’s solid asset quality with low levels of impaired loans. Westpac's Stage 3 loans (non-performing loans) totalled AUD 7.3 billion at end-FY22, down 23% YoY largely reflecting improved mortgage recoveries, accounting for 1.0% of total gross loans at end-FY22. The bank’s Stage 2 loans, which are loans where there has been a significant increase in credit risk but are still performing, nearly doubled YoY at end-FY22 driven by model adjustments to account for increased economic downside scenarios. Stage 2 loans represented 16% of total gross loans at end-FY22, significantly higher than the 10% at end-FY21. Westpac’s total exposure to commercial property sector amounted to AUD 76.1 billion at end-FY22, equivalent to a manageable 6.4% of total exposures, with the majority of exposures concentrated within Australia and New Zealand. This portfolio continued to perform well in FY22 and impaired assets represented 0.07% of total CRE exposures at end-FY22, down from 0.21% at end FY21.
DBRS Morningstar considers Westpac to have made significant progress in addressing its risk shortcomings raised by AUSTRAC and APRA since 2018, which translated into an AUD 1 billion capital-add on at end-December 2019. APRA closed its investigation into Westpac’s anti-money laundering breaches in March 2021 but the requirement to hold the capital add-on still remains. The Group also faced some regulatory breaches in its New Zealand subsidiary during 2018 and 2019, although the liquidity overlay implemented since January 2021 was removed in September 2022 to reflect good progress in addressing these issues. DBRS Morningstar will continue to monitor Westpac’s ongoing progress in strengthening its operational risk governance framework.
Funding and Liquidity Combined Building Block (BB) Assessment: Strong/Good
Westpac has a strong funding and liquidity profile, supported by a significant customer deposit base and wholesale funding diversification. Since the onset of the COVID-19 pandemic, customer deposits have experienced significant growth, similar to its domestic peers. Westpac’s customer deposits (including CDs) totalled AUD 659 billion at end-FY22, an increase of 5% YoY, similar to the 6% growth at end-FY21 and 5% at end-FY20. The Group’s net loan-to-deposit was 112% at end-FY22, broadly stable YoY and improved from 127% at end-FY18. Westpac, similar to its main Australian peers, makes large usage of wholesale funding, which accounted for 24% of total non-equity funding, although it is well diversified by instrument, currency and maturity. Liquidity is sound with a reported Liquidity Coverage Ratio of 132%, and a Net Stable Funding Ratio (NSFR) of 121% at end-FY22.
Capitalisation Combined Building Block (BB) Assessment: Strong
Westpac’s capital position is solid, supported by improved earnings generation, particularly in the last two years, de-risking, and good access to capital markets. The Group reported an APRA Common Equity Tier 1 (CET1) ratio of 11.3% at end-FY22, slightly down from 12.3% at end-FY21. The decline was largely related to the AUD 3.5 billion off-market share buy-back that was completed in February 2022 and a 9% growth in Risk Weighted Assets as a result of a widening of the 2 and 3 year swap rate. The CET1 ratio is still comfortably above APRA’s “unquestionably strong benchmark” of 10.5%. In addition, Westpac announced that they intend to maintain a CET1 ratio in the range of 11%-11.5% at all times. DBRS Morningstar notes that on an “internationally comparable” basis, Westpac reported a strong CET1 ratio of 17.6% and leverage ratio of 6% at end-FY22.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/405573
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Governance (G) Factors:
The subfactor ‘corporate governance’ is relevant to the rating of Westpac but does not affect the overall rating or trend assigned to the bank. This is reflected in the Risk grid building block. As part of various domestic regulatory investigations, significant operational risk shortcomings were identified in 2018 and 2019. As a result, Westpac was required to improve its risk governance framework and implement a remediation plan. DBRS Morningstar considers that Westpac has made good progress in addressing past operational risk issues but recognises Westpac still needs to complete its remediation plan to APRA’s satisfaction before the AUD 1 billion capital-add on is lowered or removed.
There were no Environmental or Social 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, Westpac 2022 Annual Report, Westpac 2022 Full Year Financial Results, Westpac 2022 Presentation and Investor Discussion Pack, Westpac 2022 Sustainability Supplement. 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/405572
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 Global FIG
Initial Rating Date: 02/01/2005
Last Rating Date: 11/23/2021
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