Fitch Affirms Bendigo Bank at 'A-'; Outlook Negative

(The following statement was released by the rating agency) Fitch Ratings-Sydney-30 November 2020: Fitch Ratings has affirmed Bendigo and Adelaide Bank Limited's (BEN) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'A-'. The Outlook is Negative. At the same time, Fitch affirmed BEN's other ratings as detailed below. Key Rating Drivers IDRs, VR AND SENIOR DEBT BEN's IDRs and senior debt ratings are driven by the Viability Rating (VR), which reflects the bank's risk appetite settings that are skewed towards residential mortgages and have historically supported the bank's financial profile. However, the operating environment in Australia has been affected significantly by the coronavirus. We believe this has been, and will continue to be, reflected in BEN's performance. 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" (www.fitchratings.com/site/re/10135033), is for Australia's GDP to contract by 3.6% in 2020, before rebounding 3.9% in 2021. Under this scenario, we are likely to revise the factor outlook to stable in 2021. Asset-quality metrics are likely to weaken as loan deferrals mature and support measures provided by authorities and banks unwind. We expect BEN's asset quality core metric - stage 3 loans/gross loans - to weaken through 2021, ultimately peaking above 2%, compared with 1.7% at the financial year ended 30 June 2020 (FYE20). Asset-quality metrics would remain consistent with our current factor score of 'a' even at these levels but considerable downside risk remains, resulting in the negative outlook for the score being maintained. Earnings are also likely to remain under pressure through 2021 and we have maintained our negative outlook on the 'bbb+' factor score as a result. Low interest rates and strong competition were already affecting earnings prior to the pandemic and have been compounded by a rise in loan impairment charges and a large number of one-off items. We expect an improvement in the operating profit/risk-weighted asset ratio in FY21, as the software impairment charges and write-downs are unlikely to be repeated, but the core metric is likely to remain low relative to historical levels. As a result, BEN's earnings score could be lowered even if our base case emerges, which would further erode buffers at the current rating level. BEN's capitalisation has low buffers at the current score of 'a-' despite capital raising activities completed in 2020. The bank's common equity Tier 1 (CET1) ratio is toward the lower end of domestic peers and the negative outlook on the score reflects the downside risk to our base case. International peer comparison of the CET1 ratio is more challenging, as Fitch believes the conservative implementation of global capital rules in Australia means the ratio is lower than may be reported on a more internationally comparable basis. The capitalisation and leverage score is likely to be revised to stable if the CET1 ratio performs in line with Fitch's expectations. Fitch expects limited funding and liquidity pressures for BEN over the next two years due to the high level of liquidity in the system, driven by support from authorities. Deposits are likely to remain the key source of funding, and we expect wholesale issuance to be limited due to low-cost funding availability from the Reserve Bank of Australia. The bank reported regulatory action in October by way of an external review and a 10% penalty on expected cash outflows for the calculation of regulatory liquidity ratios as a result of self-reported breaches in historical calculations. Fitch believes any findings of widespread deficiencies or weaknesses in controls or risk management could change the view that the penalties announced so far are not likely to pressure the ratings by themselves. BEN'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 BEN's IDRs, consistent with Fitch's Bank Rating Criteria. SUPPORT RATING AND SUPPORT RATING FLOOR BEN's Support Rating (SR) of '3' and Support Rating Floor (SRF) of 'BB' reflect the moderate potential of support from the authorities, if required, in light of BEN's modest market share and role in the banking system. SUBORDINATED DEBT BEN's subordinated Tier 2 debt is rated two notches below the anchor rating, the VR, which is consistent with the base case in Fitch's Bank Rating Criteria. This reflects two notches for loss severity and zero notches for non-performance risk, with the latter already adequately reflected in the VR. None of the reasons for alternative notching 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: BEN's IDRs, VR and senior debt ratings could be downgraded if the economic environment deteriorates significantly beyond our base-case scenario. We would expect to lower the operating environment score to 'a+' under this downside scenario, which could result in a lowering of our assessment of the financial profile factors. BEN's ratings may also be downgraded if there is a sustained deterioration to the bank's financial metrics, which could include a combination of: - stage 3 loans/gross loans increases to above 3% for a sustained period; - operating profit/risk-weighted assets declines below 1% for a sustained period; and/or - the CET1 ratio falls below 9% without a credible plan to increase it back above this level. The ratings are also sensitive to an increase in BEN's risk appetite, such as a loosening of underwriting standards or risk controls in the pursuit of growth, although that appears unlikely in the current environment. However, a downgrade of BEN's short-term ratings 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: The Outlook on BEN may be revised to Stable if the economic downturn is broadly in line with our base-case expectations. An upgrade in BEN's VR, IDRs and senior debt ratings appears unlikely, as it would require a shallower and quicker recovery than expected in Fitch's base case combined with a substantial improvement in BEN's franchise and core financial metrics. The Short-Term IDR could be upgraded to 'F2', even though it is improbable, if Fitch revised the funding and liquidity score to 'a' from 'bbb+'. This would require the loan/customer deposit ratio to decline to and remain consistently below 125%. SUPPORT RATING AND SUPPORT RATING FLOOR Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade: The SR and SRF are sensitive to changes in Fitch's assumptions about the propensity or ability of the Australian sovereign (AAA/Stable) to provide timely support. Negative action on the SR and SRF will not directly affect BEN's IDRs, which are currently driven by the VR. Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade: Positive action on the SR and SRF is not likely to affect BEN's IDRs unless the action provided by the sovereign is significant. SUBORDINATED DEBT Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade: BEN's Tier 2 debt ratings are sensitive to the same factors that may affect its VR. A downgrade in BEN's VR is likely to be reflected in the Tier 2 debt ratings. Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade: An upgrade of BEN's VR is also likely to be reflected in the Tier 2 debt ratings. 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 Bendigo and Adelaide Bank 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 ----senior unsecured; Long Term Rating; Affirmed; A- ----senior unsecured; Short Term Rating; Affirmed; F2 ----senior unsecured; Short Term Rating; Affirmed; F2 Contacts: Primary Rating Analyst Jack Do, Director +61 2 8256 0355 Fitch Australia Pty Ltd Suite 15.01, Level 15 135 King Street Sydney 2000 Secondary Rating Analyst George Hong, Director +61 2 8256 0345 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/10145092) Solicitation Status (https://www.fitchratings.com/site/pr/10145092#solicitation) Endorsement Status (https://www.fitchratings.com/site/pr/10145092#endorsement_status) Endorsement Policy (https://www.fitchratings.com/site/pr/10145092#endorsement-policy) ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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