DBRS Morningstar Confirms Westpac’s Long-Term Issuer Ratings at AA, Stable Trend

DBRS Ratings Limited (DBRS Morningstar) confirmed the credit 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 credit 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 credit ratings at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS

The confirmation of the credit ratings reflects the strength of Westpac’s banking franchise in the domestic markets of Australia and New Zealand, as well as Westpac’s robust capital position and sound asset quality, despite some early signs of deterioration as a result of the higher interest rate environment. The credit ratings also take into account the Group’s improving earnings generation supported by higher net interest income and a disciplined cost base although profitability remains weaker than most domestic and international peers. The credit ratings also take into account that Westpac’s funding profile has benefitted in recent years from customer deposit growth and that the Group makes ample usage of wholesale funding.

CREDIT RATING DRIVERS

Given Westpac’s high credit rating level an upgrade in the short-term is unlikely. However, over the longer-term, an upgrade of the credit ratings would require a sustained improvement in profitability and lower usage of wholesale funding, whilst maintaining sound asset quality and capital.

A downgrade of the credit ratings could be driven by significant deterioration in asset quality, impacting capital and/or if additional shortcomings emerge in risk management. Furthermore, a downgrade of the long-term credit ratings would occur if, in DBRS Morningstar’s opinion, the likelihood of timely systemic support were reduced.

CREDIT RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Very Strong/Strong
With total assets of AUD 1,029.8 billion at end-September 2023 (end-FY23) Westpac is one of the largest banks in Australia and New Zealand, where it has strong market shares of 21% for Australian household mortgages and deposits complemented by 18% market share in both deposit and consumer lending in Australia. As part of focusing on its home markets of Australia and New Zealand, Westpac completed the sale of a number of non-core businesses in recent years, including BT Personal and Corporate Super, Advanced Asset management, General Insurance, Life Insurance, Motor Vehicle Dealer Finance and Novated Leasing.

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. In addition, profitability is benefitting from the higher interest rate environment. The Group reported statutory net profit attributable to owners of AUD 7.2 billion in FY23, up 26% from AUD 5.7 billion in FY22. Westpac reported a return on average ordinary equity (ROE) of 10.09% in FY23, improved from 8.10% and 7.70% in FY22 and FY21 respectively. In FY23, profitability benefitted from net interest income (NII) growth year-on-year (YOY), largely driven by margin growth partly due to loan growth. The growth in NII offset the higher, albeit still low, loan loss provisions, largely related to some adjustments to commercial real estate price forecast and higher mortgage delinquencies. The Net Interest Margin (NIM), on a statutory basis, was 1.95% in FY23, slightly higher than 1.93% in FY22. However, DBRS Morningstar expects margin pressure to intensify in FY24 largely due to intense competition for mortgages and deposits and higher deposit costs. Westpac has maintained a generally strict cost control discipline in recent years. Operating expenses, on a statutory basis, were down 1% YOY in FY23 and the Group's cost-income ratio improved to 49% from 55% in FY23 compared to FY22.

Risk Combined Building Block (BB) Assessment: Strong/Good
Westpac has a generally conservative credit risk profile. Asset quality remains sound, despite some signs of slight deterioration in the form of higher Stage 3 and Stage 2 loans. Westpac's Stage 3 loans (non-performing loans) went up 15% YOY at end-FY23, largely reflecting an increase in mortgage lending quality deterioration. However, Stage 3 loans still accounted for a still very low (1.07%) portion of total gross loans. Additionally, some deterioration was also noticeable in Stage 2 loans, which increased by 34% YOY at end-FY23, largely related to changes into economic assumptions in credit models. Stage 2 loans accounted for 21% of total gross loans at end-FY23, significantly up from 16% at end-FY22 and 10% at end-FY21. Exposure to the commercial property sector (6.58% of total credit exposures at end-FY23) continues to perform well with an impaired loan ratio of 0.08%.

Funding and Liquidity Combined Building Block (BB) Assessment: Strong/Good
Westpac has a strong funding and liquidity profile supported by a sound customer deposit base and good access to wholesale funding. At end-FY23, Westpac’s customer deposits (including certificates of deposits, CDs) totalled AUD 688.2 billion, and were up 4% YoY, having grown steadily since FY20. The Group’s net loan-to-deposit ratio (as calculated by DBRS Morningstar and including certificates of deposits) was 112% at end-FY23, stable since FY21 and improved from 127% at end-FY18. Westpac’s wholesale funding (as calculated by DBRS Morningstar and including certificates of deposits) accounted for 24% of total non-equity funding, with short-term funding representing 4% of total non-equity funding. The Group maintains strong access to wholesale markets and wholesale funding is well diversified by instrument, currency and maturity. Liquidity is sound with a reported Liquidity Coverage Ratio (LCR) of 134%, and a Net Stable Funding Ratio (NSFR) of 115% at end-FY23.

Capitalisation Combined Building Block (BB) Assessment: Strong
Westpac has a solid capital position largely supported by strong earnings generation and good access to capital markets. At end-FY23, the Group reported an APRA Common Equity Tier 1 (CET1) ratio of 12.4%, improved 109 bps from 11.3% at end-FY22 and in line with the ratio at end-FY21, largely driven by improved retained earnings and risk weighted assets reduction following the implementation of the new capital framework effective January 1, 2023. The Group's end-FY23 CET1 ratio is above APRA’s 10.25% minimum regulatory requirement and Westpac has announced that it intends to maintain a CET1 ratio within the 11%-11.5% range in normal operating conditions.

Further details on the Scorecard Indicators and Building Block Assessments can be found at ADD LINK

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Governance (G) Factors
The subfactor ‘corporate governance’ is relevant to the credit rating of Westpac but does not affect the overall credit rating or trend assigned to the bank. This is reflected in the Risk grid building block. During 2018 and 2019, APRA identified significant operational risk shortcomings and Westpac was required to improve its risk governance framework and implement a remediation plan. Westpac has implemented 94% of the remedy actions included in the program announced to address past operational risk shortcomings both in Australia and New Zealand. However, at end-FY23, the regulatory capital add-on of AUD 1 billion remains in place. DBRS Morningstar expects the capital add-on to remain in place until the program is fully completed to APRA’s satisfaction.

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 (4 July 2023) - https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings

Notes:

All figures are in AUD unless otherwise noted.

The principal methodology is the Global Methodology for Ratings Banks and Banking Organisations (22 June 2023) https://www.dbrsmorningstar.com/research/415978/global-methodology-for-rating-banks-and-banking-organisations. 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/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies

The sources of information used for this credit rating include Morningstar Inc. and Company Documents, Westpac 2023 Annual Report, Westpac 2023 Full Year Financial Results, Westpac 2023 Presentation and Investor Discussion Pack, Westpac 2023 Climate report. DBRS Morningstar considers the information available to it for the purposes of providing this credit 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 credit 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 credit 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://registers.esma.europa.eu/cerep-publication. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://www.dbrsmorningstar.com/research/423455

This credit 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: William Schwartz, Senior Vice President, Credit Ratings, Global Fundamental Ratings, Credit Practices
Initial Rating Date: 1 February 2005
Last Rating Date: 21 November 2022

DBRS Ratings Limited
1 Oliver’s Yard 55-71 City Road, 2nd Floor, London ECY 1HQ 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