(The following statement was released by the rating agency) Fitch Ratings-Sydney-April 07: Fitch Ratings has downgraded Commonwealth Bank of Australia's (CBA) Long-Term Issuer Default Rating (IDR) to 'A+' from 'AA-' and the Viability Rating (VR) to 'a+' from 'aa-'. The Outlook on the Long-Term IDR is Negative. The Short-Term IDR has also been downgraded to 'F1' from 'F1+'. The Support Rating and Support Rating Floor have been affirmed at '1' and 'A', respectively. Fitch has also downgraded the IDRs of CBA's wholly owned New Zealand subsidiary, ASB Bank Limited, to 'A+/Negative/F1' from 'AA-/Negative/F1+' and affirmed the Support Rating at '1' and VR at 'a' at the same time. Ratings of senior debt issued by CBA and ASB's wholly owned funding vehicle, ASB Finance Limited, have been downgraded to 'A+' from 'AA-'. CBA's Tier 2 debt has been downgraded to 'A-' from 'A+' and removed from under criteria observation. The Long-Term IDRs, VR and senior debt ratings have been downgraded to reflect the significant impact measures to slow the spread of the coronavirus will have on CBA's core markets of Australia and New Zealand. We expect the Australian economy to contract by over 2% in 2020, with unemployment averaging 7.7% for the year. The Short-Term IDRs have been downgraded as the funding and liquidity factor score is not sufficiently high to support the higher of the two options at a Long-Term IDR of 'A+'. We expect CBA's financial profile, particularly asset quality and profitability, to be significantly affected in the medium term, and no longer be consistent with our expectations for a bank with a VR in the 'aa' range even with the substantial regulatory and government support being provided. We had previously flagged such a scenario as a downgrade sensitivity for CBA. The Outlook reflects that there is considerable risk to Fitch's current economic outlook and this could further weaken CBA's financial profile below our expectations at the current rating level over the next two years. Key Rating Drivers IDRS, VR AND SENIOR DEBT CBA CBA's IDRs, VR and senior debt ratings remain underpinned by the bank's strong company profile, which supports its sound financial profile. CBA's franchise does not appear to have been impaired by its remediation of conduct-related issues, which was a key reason for the Negative Outlook at the previous rating level. However, measures aimed at slowing the spread of the coronavirus have led to a sharp deterioration in the operating environment, which Fitch expects to result in a significant weakening of asset quality and earnings over the next two years. Fitch has revised its operating environment factor outlook for Australia to negative as part of this action. The agency's base case is for a sharp downturn in economic growth in 1H20, with only a partial stabilisation in 3Q20 - a proper recovery is not anticipated to begin until 4Q20, but would likely still be weighed down by a weakened labour force. Under this scenario, we would be likely to maintain our operating environment mid-point at 'aa-' and revise the factor outlook back to stable once the recovery was established. However, risks are clearly to the downside and a longer, more protracted downturn and then a shallower recovery will have a more lasting impact on the Australian economy, through lower GDP growth and higher levels of unemployment. Such a scenario would be likely to result in a lowering of our operating environment factor mid-point to 'a+'. Asset-quality metrics could take some time, potentially more than 12 months, to show significant signs of deterioration due to actions being taken by banks and authorities to support households and businesses. These measures include widespread repayment deferments for affected customers, government income support (including wage subsidies), discounted funding from the Reserve Bank of Australia (RBA) with incentives to provide credit to small businesses, and a facility co-funded by the banks and the government to provide credit to small businesses that benefits from a 50% guarantee from the government. Nevertheless, we expect a portion of the customer base to be unable to resume repayments once repayment deferments have ended, resulting in elevated impaired asset levels that will take much longer to resolve, with Fitch's core asset-quality metric of impaired loans/gross loans likely to remain above 1% for a period of time. This is the threshold that Fitch's bank criteria typically require for a factor score in the 'aa' range when the operating environment score is also in the 'aa' range. We have lowered the asset-quality factor mid-point to 'a+' from 'aa-' as a result, and assigned a negative outlook on the factor. Earnings had already been under pressure on a number of fronts, but the economic shock will result in a prolonged weakening even from current levels. Impairment charges will rise from very low levels to reflect weakening asset quality, exacerbated by IFRS9 provisioning requirements. Revenue will be squeezed by lower interest rates - the RBA has indicated the cash rate is unlikely to change from 0.25% for up to three years - and lower non-interest income as credit growth slows. Access to low-cost funding from the RBA through a term funding facility of at least AUD90 billion will provide some offset to net interest margin pressure. Some of these factors are cyclical; however, there are also longer lasting elements that mean earnings will no longer be commensurate with a 'aa-' mid-point through the cycle. We have therefore lowered the mid-point to 'a+' and maintained a negative outlook to reflect further risk to earnings should the downturn prove to be significantly worse than our base case. Capital ratios will also come under some pressure as asset quality weakens and may take time to be restored post the coronavirus pandemic, taking into consideration our expectations for earnings to decline. However, buffers built since the global financial crisis leave CBA relatively well-positioned and we expect capitalisation to remain consistent with a mid-point of 'a+', even if the downturn modestly exceeds our base case. We have retained a stable outlook as a result, although pressure on this score is likely should the downturn significantly exceed our base case. CBA's funding profile is being supported through liquidity and funding facilities offered by the RBA. The central bank has indicated that liquidity support will continue to ensure credit remains available for the broader economy. This, combined with a sound liquidity position at the start, means CBA appears in a reasonable position to withstand short-term funding pressures. In addition, we expect the strength of CBA's franchise to support its deposit base through the crisis. However, we still regard the funding profile, which incorporates a reliance on offshore wholesale markets, as a weakness relative to many similarly rated international banks. This is reflected in a mid-point of 'a' that is lower than the VR. ASB ASB's IDRs, including the Negative Outlook, and the Support Rating reflect Fitch's assessment that there continues to be an extremely high likelihood of support from its 100% owner, CBA, if required. Fitch believes ASB remains a key and integral part of the CBA banking group with strong integration across management, risk frameworks and internal systems. ASB's profitability also contributes to CBA's diversified revenue sources. The prospect of support is bolstered by the strong linkages between the Australian and New Zealand banking regulators, which Fitch believes will work together to ensure the stability of both financial systems. The key drivers of ASB's VR are those outlined in our rating action commentary "Fitch Affirms ASB Bank Limited at 'AA-'; Outlook Negative", published on 3 March 2020, with the following exceptions: Fitch has revised the outlook on the 'a' operating environment mid-point for New Zealand banks to negative from stable to reflect the significant downside risks posed by the measures undertaken to slow the spread of the coronavirus pandemic. We would likely revise this outlook to stable if our base case of a recovery starting in 2H20 eventuates, similar to Australia. This revision has resulted in negative outlooks being placed on the company profile (a+), asset quality (a) and earnings and profitability (a+) mid-points. We expect a significantly weaker operating environment to put pressure on ASB's business model, which is the driver for the negative outlook on ASB's company profile. Similarly, a weak operating environment is likely to result in deteriorating asset-quality and earnings metrics, such that they are no longer commensurate with the current mid-points. The capitalisation and funding mid-points remain unchanged with stable outlooks. The former reflects the buffers ASB has at the current mid-point while the latter is due to our view that funding and liquidity metrics are unlikely to face significant pressure in the short term due to sizeable support measures put in place by the authorities. The senior debt of ASB Finance Limited benefit from a guarantee from ASB and the rating of these instruments are therefore equalised with ASB's IDRs. SUPPORT RATING AND SUPPORT RATING FLOOR CBA CBA's Support Rating and Support Rating Floor reflect its systemic importance, as highlighted by the bank's market share in Australia. In addition, CBA has a similar business model to the other large Australian banks, which increases the prospects that all four banks will be treated similarly in a stressed environment. We believe there is an extremely high probability of support from Australian authorities, if needed, as a result. The Support Rating Floor also reflects a historical propensity for Australian authorities to support senior creditors of banks. This has been highlighted numerous times, including the strong provision of liquidity and long-term loan facilities by the RBA in response to the pandemic, and was also reflected during the global financial crisis of 2008 through the implementation of a government guarantee for senior bondholders. This approach has been reinforced by the regulatory approach to loss-absorbing capital, which does not allow for a senior bail-in instrument. The additional loss-absorbing capital requirement is to be met through existing capital instruments, such as Tier 2 capital securities. SUBORDINATED DEBT CBA's subordinated Tier 2 debt is rated two notches below its anchor rating, the VR, which is consistent with the base case in Fitch's Bank Rating Criteria, published 28 February 2020. The ratings on these instruments have been downgraded by two notches, one notch due to the downgrade of CBA's VR and one notch to reflect the change in the base case to two notches below the anchor rating for loss severity in the Fitch's updated criteria, from one notch in the previous version of the criteria. None of the reasons for maintaining the notching at one below the anchor rating is present. The ratings of these instruments have been removed from under criteria observation at the same time. RATING SENSITIVITIES IDRS, VR AND SENIOR DEBT CBA Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade: CBA's Outlook may be revised to Stable if the downturn broadly aligns with our base case expectations. Under such a scenario we would expect weakening of the financial profile to be sufficiently limited to ensure metrics broadly align with the VR of 'a+'. CBA's VR and IDRs are unlikely to be upgraded in the near term given the Negative Outlook and our expectations for a weakening of the operating environment, but they may be upgraded if the economic downturn is shallower than expected in Fitch's base case and the recovery swifter and sharper as this may result in CBA's financial profile, particularly asset quality and earnings, remaining more consistent with a VR in the 'aa' range. Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade: CBA's IDRs, VR and senior debt ratings could be downgraded if the economic environment deteriorates significantly beyond our base case scenario. Under this scenario, we would expect to lower the operating environment mid-point to 'a+', which would result in a lowering of our assessment of most financial profile factors. Any downgrade would be limited to one notch unless the Support Rating Floor of 'A' was also downgraded. In particular, such an environment would see greater and more prolonged asset-quality deterioration across CBA's business and mortgage portfolios, placing further pressure on earnings and potentially capitalisation - metrics on all three factors would most likely be more consistent with an 'a' score in such a scenario. Bank measures to help clients through the downturn will become less effective the longer the downturn lasts, which is likely to limit the speed of the recovery after the pandemic has been brought under control. ASB Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade: ASB's IDRs and Outlook are equalised with those of CBA. ASB's IDRs may be upgraded if CBA's IDRs are upgraded so long as there has been no change in our view on CBA's propensity to provide support to ASB. An upgrade of ASB's VR would require further improvements in the funding and liquidity metrics to levels similar to banks with higher mid-points and maintenance of strong asset quality in combination with strengthened capitalisation. The ratings of the senior debt issued by ASB Finance Limited will move in line with ASB's IDRs as long as the guarantee remains in place. Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade: Any downgrade in CBA's IDRs is likely to be also reflected in ASB's IDRs. The Support Rating and IDRs may be downgraded should Fitch change its view of ASB's importance to its parent. This could include any decision by CBA to significantly scale back operations in New Zealand as well as a partial or full sale of ASB. In addition, deterioration in cooperation between the Australian and New Zealand regulators could lower CBA's ability to provide timely support to ASB, which would also pressure ratings. However, neither of these scenarios is likely in our view. ASB has sufficient headroom at the current VR to withstand our base case scenario, with most factors scored in line with or above the VR. A more severe and prolonged downturn resulting in only a shallow recovery in New Zealand in 2021 would however pressure asset quality, earnings and possibly capitalisation, which could result in a downgrade of ASB's VR. The ratings of the senior debt issued by ASB Finance Limited will move in line with ASB's IDRs as long as the guarantee remains in place. SUPPORT RATING AND SUPPORT RATING FLOOR Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade: The Support Rating of '1' is the highest Fitch assigns and cannot be upgraded. The Support Rating Floor may be upgraded if Australian authorities provide additional, explicit statements of support for domestic systemically important banks (D-SIBs), including CBA, or other actions by authorities provide greater certainty that support would be provided if needed. Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade: A weakening in the propensity for the authorities to provide support may result in Fitch lowering CBA's Support Rating and Support Rating Floor. However, this appears unlikely. A change in the ability of authorities to provide support, which is likely to be reflected in a downgrade of Australia's sovereign rating (AAA/Stable), may also result in a downgrade of the Support Rating and Support Rating Floor. Any change in the Support Rating Floor would not directly affect the CBA's IDRs, which are driven by its VR. SUBORDINATED DEBT Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade: CBA's subordinated Tier 2 debt ratings are sensitive to the same factors that may affect the bank's VR. An upgrade of CBA's VR would therefore be reflected in the Tier 2 debt ratings. Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade: The Tier 2 debt ratings would be downgraded if CBA's VR is downgraded. Best/Worst Case Rating Scenario Ratings of financial institution issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, go to https://www.fitchratings.com/site/re/10111579. REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. Public Ratings with Credit Linkage to other ratings ASB's ratings are linked to the ratings of CBA. The ratings of ASB Finance's senior debt issues are linked to ASB's ratings due to the provision of a guarantee by ASB over these instruments. ESG Considerations ESG issues are credit neutral or have only a minimal credit impact on the entity(ies), either due to their nature or the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg. Contacts: Primary Rating Analyst George Hong, Director +61 2 8256 0345 Fitch Australia Pty Ltd Level 15 77 King Street Sydney NSW 2000 Primary Rating Analyst Tim Roche, Senior Director +61 2 8256 0310 Fitch Australia Pty Ltd Level 15 77 King Street Sydney NSW 2000 Secondary Rating Analyst Tim Roche, Senior Director +61 2 8256 0310 Secondary Rating Analyst Jack Do, Director +61 2 8256 0355 Committee Chairperson Heakyu Chang, Senior Director +822 3278 8363
Media Relations: Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@thefitchgroup.com; Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com. Additional information is available on www.fitchratings.com Applicable Criteria Bank Rating Criteria (pub. 28 Feb 2020) (including rating assumption sensitivity) https://www.fitchratings.com/site/re/10110041 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/site/dodd-frank-disclosure/10116082 Solicitation Status https://www.fitchratings.com/site/pr/10116082#solicitation Endorsement Status https://www.fitchratings.com/site/pr/10116082#endorsement_status Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, THE FOLLOWING https://www.fitchratings.com/site/dam/jcr:6b03c4cd-611d-47ec-b8f1-183c01b51b08/R ating%20Definitions%20-%203%20May%202019%20v3%206-11-19.pdf DETAILS FITCH'S RATING DEFINITIONS FOR EACH RATING SCALE AND RATING CATEGORIES, INCLUDING DEFINITIONS RELATING TO DEFAULT. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE AT HTTPS://WWW.FITCHRATINGS.COM/SITE/REGULATORY. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2020 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001 Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (the "NRSRO"). While certain of the NRSRO's credit rating subsidiaries are listed on Item 3 of Form NRSRO and as such are authorized to issue credit ratings on behalf of the NRSRO (see https://www.fitchratings.com/site/regulatory), other credit rating subsidiaries are not listed on Form NRSRO (the "non-NRSROs") and therefore credit ratings issued by those subsidiaries are not issued on behalf of the NRSRO. However, non-NRSRO personnel may participate in determining credit ratings issued by or on behalf of the NRSRO.