Fitch Affirms Bank of Queensland at 'A-'; Outlook Negative

(The following statement was released by the rating agency) Fitch Ratings-Sydney-30 November 2020: Fitch Ratings has affirmed Bank of Queensland Limited's (BOQ) Long-Term Issuer Default Rating (IDR) of 'A-' with a Negative Outlook. BOQ's Short-Term IDR, Viability Rating (VR), Support Rating and senior unsecured debt ratings have been affirmed at the same time. Key Rating Drivers IDRS, VR AND SENIOR DEBT BOQ's IDRs and senior debt ratings are driven by its Viability Rating (VR), which is underpinned by the bank's sound risk management as well as the competitive advantages in its key markets. However, we believe the pandemic-induced economic downturn will negatively affect the operating environment and weaken BOQ's financial profile over the next two years, especially its asset quality and profitability. We have maintained a negative factor outlook on the 'aa-' operating environment score for Australian banks to reflect continued downside risks to our base-case forecasts although the level of uncertainty has reduced since we revised the factor outlook in April 2020. Australia has controlled the spread of the coronavirus well, resulting in the economic outlook strengthening. However, downside risk due to additional outbreaks and associated lockdowns remains until widespread vaccination is achieved, while the removal of some support measures may also temper the economic recovery. Fitch's base case, as outlined in the Global Economic Outlook - September 2020 (https://www.fitchratings.com/site/re/10135033) is for Australian GDP to contract by 3.6% in 2020, before returning to growth of 3.9% in 2021. Under this scenario, we are likely to revise the factor outlook to stable in 2021. We expect BOQ's stage 3 loans/gross loans ratio, the core metric for asset quality, to continue weakening in the next 12 months and peak above 2% through 2021. This ratio has increased to 1.3% by the end of August 2020. The bank's exposure to the SME sector is higher than that of its regional peers and may be more susceptible to asset-quality deterioration. However, we expect BOQ's asset-quality metrics to remain consistent with its current score of 'a' under our base case. The negative factor outlook reflects continued downside risk to our base case expectations in the short to medium term. Profitability is also likely to remain under pressure in 2021 as we expect subdued credit growth and low interest rates to persist. Impairment charges may be lower than the levels in 2020, but we believe they will remain high relative to historical levels. Ongoing investments in regulatory compliance and digital transformation will add to the profitability pressure, but the low-cost term funding facility provided by the Reserve Bank of Australia could provide some relief in the form of reduced funding costs. BOQ's operating profit/risk-weighted assets declined to 0.5% during the financial year ended 31 August 2020 (FY20) largely due to the increase in impairment charges, and we do not expect this ratio to improve materially over the next two years due to the structural challenges facing profitability for the banking sector. We have maintained the negative factor outlook to reflect the limited buffer at its current score of 'bbb+'. We believe BOQ's common equity Tier 1 (CET1) ratio will remain consistent with its current capitalisation and leverage score of 'bbb+' over the next two years. We have taken into account the Australian Prudential (LON:PRU) Regulation Authority's conservative approach to implementing global rules when assessing its capital score. BOQ raised capital in late 2019, which pushed up its capital ratios above that of most Fitch-rated Australian mid-sized banks. We believe BOQ will be able to maintain its CET1 ratio within the range of 9.0%-9.5%, and therefore have kept the factor outlook unchanged at stable. We expect BOQ's funding and liquidity profile to remain sound over the next 12 months benefiting from high levels of system liquidity. The short-term pressure caused by the market dislocation has been mitigated by strong support from the authorities. The bank's reliance on wholesale funding may be reduced in the short term, although we do not expect a material change over the longer term, reflecting the short-term nature of the liquidity support. The factor score remains unchanged at 'bbb+' with a stable outlook. BOQ's Short-Term IDR of 'F2' is at the lower of the two options available at a Long-Term IDR of 'A-', as the funding and liquidity score is not sufficiently high enough to support the higher option (the threshold is a score of at least 'a'). Senior debt ratings are aligned with BOQ's IDRs, consistent with Fitch's Bank Rating Criteria. SUPPORT RATING AND SUPPORT RATING FLOOR BOQ's Support Rating of '3' and Support Rating Floor of 'BB' reflect moderate potential support from the authorities, if needed, in light of BOQ's modest market share and role in the banking system. SUBORDINATED DEBT BOQ's subordinated Tier 2 debt is rated two notches below its anchor rating, the Viability Rating, which is consistent with the base case in Fitch's Bank Rating Criteria. The two notches below the anchor rating are for loss severity, with non-performance risk adequately captured by the Viability Rating. None of the reasons for alternative notching from the anchor rating as described in the criteria are present. RATING SENSITIVITIES IDRS, VR AND SENIOR DEBT Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade: BOQ's IDRs, VR and senior debt ratings could be downgraded if the economic environment deteriorates significantly beyond our base-case scenario. In this downside scenario, we would lower the operating environment mid-point to 'a+', which would probably result in a lowering of our assessment of most financial profile factors. BOQ's ratings may also be downgraded if a combination of the following were to occur: - Stage 3 loans/gross loans increasing to above 3% for a sustained period; - Operating profit/risk-weighted assets declining below 1% for a sustained period; and - CET1 ratio falling below 9% without a credible plan to raise it back above this level. A downgrade of BOQ's Short-Term IDR appears unlikely as it would require the Long-Term IDR to be downgraded by at least two notches to 'BBB' and the funding and liquidity score to be lowered by at least one notch to 'bbb'. Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade: BOQ's Outlook may be revised to Stable if the economic downturn is broadly in line with our base-case expectations. Under such a scenario, we would expect limited weakening of the bank's financial profile, which should continue to broadly align with the VR of 'a-'. Positive rating action on BOQ's IDRs, VR and senior debt ratings appears unlikely given the Negative Outlook. Nonetheless, a rating upgrade would require a shallower downturn and quicker recovery than expected in Fitch's base case, combined with a substantial improvement in BOQ's franchise and key financial metrics. BOQ's Short-Term IDR may be upgraded without an upgrade in the Long-Term IDR if our funding and liquidity score was upgraded two notches to 'a'. This does not seem probable in light of the bank's reliance on wholesale funding. SUPPORT RATING AND SUPPORT RATING FLOOR Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade: The Support Rating and Support Rating Floor may be revised downward if there is deterioration in Fitch's view of the propensity or ability of the Australian sovereign (AAA/Negative) to provide timely support. Negative action on the Support Rating and Support Rating Floor will not directly affect BOQ's IDRs, which are driven by the VR. Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade: The Support Rating and Support Rating Floor may be revised upward if there is improvement in Fitch's view of assumptions about the propensity or ability of the Australian sovereign to provide timely support. Positive action on the Support Rating and Support Rating Floor will not directly affect BOQ's IDRs. SUBORDINATED DEBT Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade: BOQ's Tier 2 debt ratings are sensitive to the same factors that may affect its VR. The Tier 2 debt ratings would be downgraded if BOQ's VR is downgraded. Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade: An upgrade of BOQ's VR could be reflected in the Tier 2 debt. Best/Worst Case Rating Scenario International scale credit ratings of Financial Institutions and Covered Bond 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. ESG Considerations Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg Bank of Queensland Limited; Long Term Issuer Default Rating; Affirmed; A-; Rating Outlook Negative ; Short Term Issuer Default Rating; Affirmed; F2 ; Viability Rating; Affirmed; a- ; Support Rating; Affirmed; 3 ; Support Rating Floor; Affirmed; BB ----senior unsecured; Long Term Rating; Affirmed; A- ----subordinated; Long Term Rating; Affirmed; BBB Contacts: Primary Rating Analyst George Hong, Director +61 2 8256 0345 Fitch Australia Pty Ltd Suite 15.01, Level 15 135 King Street Sydney 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 Additional Disclosures Dodd-Frank Rating Information Disclosure Form (https://www.fitchratings.com/site/dodd-frank-disclosure/10144615) Solicitation Status (https://www.fitchratings.com/site/pr/10144615#solicitation) Endorsement Status (https://www.fitchratings.com/site/pr/10144615#endorsement_status) Endorsement Policy (https://www.fitchratings.com/site/pr/10144615#endorsement-policy) ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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