(The following statement was released by the rating agency) Fitch Ratings-Sydney-April 07: Fitch Ratings has downgraded National Australia Bank Limited's (NAB) Long-Term Issuer Default Rating (IDR) to 'A+' from 'AA-' and its 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 Long- and Short-Term IDRs of NAB's wholly owned New Zealand subsidiary, Bank of New Zealand (BNZ), to 'A+'/Negative/'F1' from 'AA-'/Negative/'F1+' and affirmed the Support Rating at '1' and VR at 'a'. Ratings of senior debt issued by NAB and BNZ's wholly owned funding vehicle, BNZ International Funding Limited, have been downgraded to 'A+' from 'AA-'. NAB's Tier 2 debt has been downgraded to 'A-' from 'A+' and removed from under criteria observation. National Australia Bank Limited; Long Term Issuer Default Rating; Downgrade; A+; RO:Neg ; Short Term Issuer Default Rating; Downgrade; F1 ; Viability Rating; Downgrade; a+ ; Support Rating; Affirmed; 1 ; Support Rating Floor; Affirmed; A ----senior unsecured; Long Term Rating; Downgrade; A+ ----subordinated; Long Term Rating; Downgrade; A- Bank of New Zealand; Long Term Issuer Default Rating; Downgrade; A+; RO:Neg ; Short Term Issuer Default Rating; Downgrade; F1 ; Local Currency Long Term Issuer Default Rating; Downgrade; A+; RO:Neg ; Local Currency Short Term Issuer Default Rating; Downgrade; F1 ; Viability Rating; Affirmed; a ; Support Rating; Affirmed; 1 BNZ International Funding Limited ----senior unsecured; Long Term Rating; Downgrade; A+ Key Rating Drivers IDRS, VR AND SENIOR DEBT NAB The Long-Term IDRs, VR and senior debt ratings have been downgraded to reflect the significant impact government measures to limit the spread of the coronavirus will have on NAB's Australian and New Zealand operations. NAB's IDRs, VR and senior debt ratings are supported by the bank's strong company profile and franchise, which underpin its currently sound financial profile. However, we expect NAB's core metrics, particularly asset quality and profitability, to weaken over the next two years and no longer be consistent with our expectations for a bank with a VR in the 'aa' range. Unprecedented government and regulatory support will mitigate some of the impact but is unlikely to be sufficient to fully offset the effects. We had previously flagged a downturn in the operating environment as a downgrade sensitivity for NAB. The Negative Outlook reflects our view that there remains considerable downside risk to Fitch's current base case, which could result in a further deterioration of NAB's financial profile beyond our expectations over the next two years. The Short-Term IDR has been downgraded as the funding and liquidity factor score is not high enough to support the higher of the two rating options at a Long-Term IDR of 'A+'. NAB's franchise does not appear to have been impaired as part of its remediation of conduct-related issues, which was a key reason for the Negative Outlook at the previous rating level. Fitch has revised our operating environment factor outlook for Australia to negative from stable as part of this rating action. The agency's base case is for a sharp downturn in economic growth in 1H20, with only a partial stabilisation in 3Q20 and gradual recovery beginning in 4Q20. Under this scenario, we are likely to maintain our operating environment mid-point at 'aa-' and revise the factor outlook back to stable once there is a clearer path to recovery. However, downside risk is considerable and a more prolonged, severe downturn or slower recovery could have a structural impact on the economy such as higher levels of unemployment and an extended period of low growth. Such a scenario is likely to result in a lowering of our operating environment factor mid-point to 'a+'. Fitch expects NAB's asset quality to come under pressure because of the economic downturn. A significant weakening in the impaired-loan ratio is not likely to become evident in the next 12 months due to actions taken by the banks and authorities to support borrowers and the economy. 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. Fitch expects some of the affected customers to be able to resume repayments once the support measures dissipate and loan repayment deferrals expire. Nevertheless, this is likely to result in a higher level of impaired loans, which may take some time to resolve, and Fitch's core metric - impaired loans/gross loans - remaining 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. We had factored some weakening in NAB's earnings and profitability into our base case, but the rapid deterioration in economic outlook in recent weeks means core metrics will probably be weaker than anticipated over the next two years. This is likely to be evident through rising impairment charges due to deteriorating asset quality, margin pressure from the low interest rate environment and the weaker outlook for growth. The RBA has indicated that the cash rate is unlikely to change from the current level of 0.25% for up to three years, which means we do not expect new pressure from further rate reduction. Access to low-cost funding from the RBA through a term funding facility and easing of competitive pressures will provide some offset to net interest margin pressure. Some of these factors are cyclical although there are also longer lasting elements, meaning earnings will no longer be commensurate with an 'a+' mid-point through the cycle. We have therefore lowered the mid-point to 'a' to reflect that metrics are unlikely to be consistent with an 'a+' and maintained a negative outlook to reflect downside risk to earnings should events play out worse than our base case. Fitch expects NAB's capital ratios to come under some pressure as a result of our base case for earnings and asset quality. However, we have maintained the capitalisation mid-point at 'a+', reflecting the capital buffers that have been built since 2008, which leaves the bank in a reasonable position to withstand a downturn that modestly exceeds our base case. This score or outlook could be reviewed should signs of a deeper-than-anticipated downturn arise. NAB's funding and liquidity profile is 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 prior to the dislocation of markets, means NAB is in a reasonable position to withstand short-term funding pressures. Fitch expects the bank's strong franchise will continue to support its depositor base. NAB's reliance on wholesale funding from offshore markets remains a weakness relative to many similarly rated international peers and is reflected in its funding and liquidity mid-point of 'a', which is lower than its VR. BNZ BNZ'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, NAB, if required. Fitch believes BNZ remains a key and integral part of the NAB banking group, reflected through its strong integration across management, risk frameworks and internal systems. BNZ's profitability also serves as a source of diversification for NAB. 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 BNZ's VR and Support Rating are outlined in our rating action commentary "Fitch Affirms Bank of New Zealand at 'AA-'; Outlook Negative", published 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 back to stable if our base case of a recovery starting in 2H20 eventually takes place, similar to Australia. This revision has resulted in negative outlooks being placed on the 'a+' company profile, 'a' asset quality and 'a' earnings and profitability mid-points. We expect a significantly weaker operating environment to place pressure on NAB's business model, which is the driver for the negative outlook on the bank's company profile. Similarly, a lower operating environment score is likely to result in a weakening of 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 BNZ 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 BNZ International Funding benefits from a guarantee from BNZ and the ratings of these instruments are therefore equalised with BNZ's IDRs. SUPPORT RATING AND SUPPORT RATING FLOOR NAB NAB's Support Rating and Support Rating Floor reflect its systemic importance, highlighted by the bank's market share in Australia. In addition, NAB 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 NAB'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 revised 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 NAB's VR and one notch to reflect the change in the base case to two notches below the anchor rating for loss severity in 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 NAB Factors that could, individually or collectively, lead to negative rating action/downgrade: NAB'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' is also downgraded. In this scenario Fitch would expect to see a more severe weakening of NAB's loan portfolio and impairment charges, which would further pressure earnings and potentially capitalisation, and the metrics on these factors would most likely be more consistent with an 'a' score. Bank measures to help clients through the downturn will become less effective the longer the downturn lasts, which may limit the speed of the recovery after the pandemic has been brought under control. A weakening in the propensity for the authorities to provide support may result in Fitch lowering NAB's Support Rating and Support Rating Floor but 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 NAB's IDRs, which are currently driven by its VR. Factors that could, individually or collectively, lead to positive rating action/upgrade: NAB'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+'. NAB'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 and recovery is faster than expected in Fitch's base case as this may result in NAB's asset quality, earnings and profitability returning to levels consistent with a VR in the 'aa' range. 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, including NAB, or other actions by authorities provide greater certainty that support would be provided if needed. BNZ Factors that could, individually or collectively, lead to negative rating action/downgrade: BNZ's IDRs and Outlook are equalised with those of NAB, meaning any downgrade in NAB's IDRs are likely to be also reflected in that of BNZ's IDRs. The Support Rating and IDRs may also be downgraded should Fitch change its view of BNZ's importance to the NAB group, or if the authorities change their cross-border regulatory approach. BNZ 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 may result in a downgrade. Factors that could, individually or collectively, lead to positive rating action/upgrade: BNZs IDRs may be upgraded if NAB's IDRs are upgraded, provided our assessment of NAB's propensity and ability to support has not changed. An upgrade of BNZ'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 BNZ International Funding will move in line with BNZ's IDRs as long as the guarantee remains in place. SUBORDINATED DEBT Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade: NAB's subordinated Tier 2 debt ratings are sensitive to the same factors that may affect the bank's VR. An upgrade of NAB'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 NAB's VR is downgraded. Best/Worst Case Rating Scenario International scale credit ratings of Financial Institutions 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, visit 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 BNZ's IDRs are equalised with the Australian parent's IDRs given our view on the potential for support. The ratings of the senior debt issued by BNZ's funding subsidiaries are equalised with that of BNZ as it provides a guarantee for 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 Jack Do, Director +61 2 8256 0355 Fitch Australia Pty Ltd Level 15 77 King Street Sydney NSW 2000 Secondary Rating Analyst Tim Roche, Senior Director +61 2 8256 0310 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/10116848 Solicitation Status https://www.fitchratings.com/site/pr/10116848#solicitation Endorsement Status https://www.fitchratings.com/site/pr/10116848#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. 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