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Fitch Ratings: Fallout from Coronavirus Drives Downgrades of Large Australia, NZ Banks

Published 07/04/2020, 06:20 pm
Updated 07/04/2020, 06:24 pm

(The following statement was released by the rating agency) Fitch Ratings-Sydney-April 07: Fitch Ratings' downgrade of the Issuer Default Ratings (IDRs) of Australia's four largest banking groups and their New Zealand subsidiaries to 'A+'/'F1' from 'AA-'/'F1+' reflects the agency's expectations of a significant economic shock in 1H20 due to measures taken halt the spread of the coronavirus, followed by a moderate recovery through 2021. Fitch's economic forecasts are outlined in Fitch Ratings Coronavirus Scenarios: Baseline and Downside Cases /a and Global Economic Outlook - COVID-19 Crisis Update April 2 2020 /a . The ratings on the banks had limited buffers at the previous levels, as reflected in a Negative Outlook on the IDRs, with an economic shock and further profitability weakness as stated downgrade triggers in recent reviews. Buffers are more substantial at the new rating. Nevertheless, further downside risk remains to our baseline case, which is why a Negative Outlook has been retained on the ratings. Details of the actions can be found in the individual Rating Action Commentaries published on 7 April 2020. The affected entities are: Australia and New Zealand Banking Group Limited - ANZ Bank New Zealand Limited - Senior debt issued by ANZ New Zealand (Int'l) Limited Commonwealth Bank of Australia - ASB Bank Limited - Senior debt issued by ASB Finance Limited National Australia Bank Limited - Bank of New Zealand - Senior debt issued by BNZ International Funding Limited Westpac Banking Corporation - Westpac New Zealand Limited - Senior debt issued by Westpac Securities NZ Limited Fitch has revised the outlook on the operating environment score for banks in both Australia (aa-) and New Zealand (a) to negative from stable as part of this action. The agency expects GDP to shrink in both markets in 1H20, with only a modest recovery starting in 2H20 and extending into 2021. Unemployment is likely to spike sharply and remain very elevated relative to pre-pandemic levels even after the recovery is underway. The current operating environment scores incorporate this base case and the outlook on this factor would likely be revised to stable should the baseline case scenario eventuate. Conversely, a significant extension of the downturn into 2H20, or only a shallow recovery that results in much weaker economic conditions through 2021 and beyond could result in a reduction of the score in both markets. The implications, per Fitch's criteria, are that we would expect banks to maintain stronger financial profiles - particularly for key financial metrics - than is the case with an operating environment assessment in the 'aa' category. We expect these conditions to affect asset quality and earnings in particular, with the mid-points of both factors reduced by a notch for the large Australian banks, with negative factor outlooks. Support measures implemented by the government, regulators and banks themselves should alleviate some of the asset-quality pressure that will emerge from this downturn, particularly within the next six to 12 months. However, we expect that a portion of businesses will fail to restart once the recovery begins and some households will not be able to resume debt repayments after the repayment holidays provided by the banks. As a result, asset-quality metrics will likely weaken from current levels over the next 12-18 months and, for the four large Australian banks, we expect them to no longer be consistent with a 'aa-' factor score. Stage 3 loans ranged from 0.9% to 1.3% of gross loans at the most recent year-end for these banks. Fitch's typically expects these ratios to be sustainably under 1% to be consistent with a score in the 'aa' range, although the Australian and New Zealand banks benefit from a high level of secured lending, which should help limit losses. Earnings will face pressure from both higher impairment charges and lower interest rates. The central banks in Australia and New Zealand have cut their respective cash rates to 0.25% and indicated that they will remain there for a prolonged period. The banks' earnings were already vulnerable before the pandemic hit, which was reflected in the negative outlook on the factor. The challenges from the outbreak are likely to exacerbate this pressure. Capitalisation of these banks will be affected by the weaker asset quality, but buffers built in recent years should be sufficient at current scores under our baseline case, and we have retained a stable outlook for this factor. Funding and liquidity is supported by sound liquidity management and the significant support provided by the Australian and New Zealand central banks, with limited short-term pressure likely. The outlook for this factor remains stable as a result. The funding and liquidity scores for all banks are already lower than their respective Viability Ratings reflecting a high reliance on offshore wholesale funding. Fitch reviewed the four large banks in Australia and New Zealand ahead of the rest of the portfolio as the outlooks on the IDRs were already Negative, indicating greater susceptibility to a downgrade at their relative rating levels and a higher likelihood that they would hit previously stated downgrade sensitivities. In addition, the banks combined account for a significant majority of banking system assets in both markets. We will review the remaining Australian and New Zealand banks rated by Fitch in the near future. Contact: Tim Roche Senior Director +61 2 8256 0310 Fitch Australia Pty Ltd Level 15, 77 King St, Sydney NSW 2000 Jack Do Director +61 2 8256 0355 George Hong Director +61 2 8256 0345 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 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, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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.

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