(The following statement was released by the rating agency) Fitch Ratings-Sydney-May 06: Fitch Ratings has revised the Outlook on Commonwealth Bank of Australia's (CBA) Long-Term Issuer Default Rating (IDR) to Negative from Stable. At the same time, we have affirmed the IDR at 'AA-'. The agency has taken a similar action on CBA's New Zealand subsidiary, ASB Bank Limited. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS VIABILITY RATING, IDRS AND SENIOR UNSECURED DEBT The affirmation of CBA's ratings reflects Fitch's expectation that the bank will maintain its strong franchise and sound financial profile despite negative findings from an independent prudential inquiry into its governance, culture and accountability. The Outlook has been revised to Negative to reflect CBA's risks in remediating shortcomings in operational risk controls and governance. Management's focus may divert from ongoing operations and a likely cost increase might manifest in a weaker financial profile and franchise. There is also a risk that ongoing inquiries into the sector, including the Royal Commission, identify additional shortcomings. If this occurs, it may leave CBA more susceptible than peers to a weaker operating environment. The current operating environment is challenging for Australian banks, as reflected in Fitch's negative sector outlook. Fitch revised the Outlook as we believe the initially identified shortcomings of CBA, being risk appetite as well as management and strategy, are more widespread than we had incorporated into the previous assessment of these factors. The final report from the independent prudential inquiry, published 1 May 2018, revealed that CBA's continued financial success led to complacency within the bank. The timetable to implement the remediation recommendations is unclear. CBA will provide a roadmap to implementing the 35 recommendations to the Australian Prudential (LON:PRU) Regulation Authority (APRA) within 60 days under an enforceable undertaking provided by the bank in relation to the report. Considerable turnover in senior management and the board could assist the ambitious remediation process. The prudential inquiry report indicated that the task is larger than previous risk management initiatives, yet also acknowledged that board rigour has already shown signs of improvement under the current chair, in place since the beginning of 2017. APRA imposed an additional operational risk capital charge of AUD1 billion on CBA as a result of the findings of the report. CBA estimates that this would have reduced its end-2017 common equity Tier 1 ratio by about 30bp to 10.1%. This is toward the lower end of domestic peers but manageable for CBA, particularly in light of its profitability. This charge can be reduced or removed if CBA is able to demonstrate to APRA that it has met the undertakings outlined as part of the bank's enforceable undertaking. SUPPORT RATING AND SUPPORT RATING FLOOR CBA's Support Rating and Support Rating Floor reflect its systemic importance and an extremely high probability of support from Australian authorities, if needed. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The ratings of CBA's Tier 2 subordinated debt, both legacy and Basel III-compliant instruments, are notched down one level from the Viability Rating for loss severity. No notching has been applied for non-performance risk. SUBSIDIARY AND AFFILIATED COMPANY The Outlook on ASB and its IDRs are aligned with those of CBA to reflect Fitch's view that there continues to be an extremely high likelihood of support from CBA, if required. ASB is a highly integrated and integral part of CBA's business. The possibility of support is reinforced by strong regulatory linkages between Australia and New Zealand banking authorities. The ratings of senior unsecured debt issued by ASB Finance Limited are aligned with ASB's Long-Term IDR, as ASB guarantees the debt instruments. RATING SENSITIVITIES VIABILITY RATING, IDRS AND SENIOR UNSECURED DEBT CBA's Viability Rating and IDRs may be downgraded if management fails to contain spill-over risks from the required remediation to the ongoing business, resulting in a substantial weakening in its financial profile and franchise. Ratings are also likely to come under pressure if further shortcomings are identified in other areas of CBA's risk controls, such as credit and market risk. Conversely, the Outlook may be revised to Stable if CBA is able to strengthen its risk framework and controls in line with regulatory requirements and international best practice. Additional downside rating risks include: - a sharp deterioration in the operating environment, most likely driven by external factors; - an ongoing rise in household risks that heightens the banking system's sensitivity to significant asset-quality, profitability or capitalisation deterioration if labour market conditions were to substantially weaken or interest rates rise sharply; and - deterioration in the funding and liquidity profile as it could leave CBA susceptible to prolonged funding market dislocation. Increased competition from non-bank lenders, particularly in the digital space, may result in a lower assessment of CBA's company profile, earnings and profitability and, ultimately, ratings, should it emerge. However, we do not expect this to occur within the next two to three years. SUPPORT RATING AND SUPPORT RATING FLOOR Fitch does not expect any change to the propensity of authorities to provide support to CBA, despite global regulatory moves to limit implicit government support to banks. However, we expect Australia's resolution framework to be strengthened in the medium term, which could change our assumption around sovereign support. The regulator plans to start consultation on a framework for minimum loss-absorbing capacity and recapitalisation capacity later in 2018. This may prompt a review of Support Ratings and Support Rating Floors across the sector. A change in the ability of Australian authorities to provide support, which is likely to be reflected in a downgrade of the Australian sovereign (AAA/Stable), may also result in a downgrade of CBA's Support Rating and Support Rating Floor. However, this would not directly affect CBA's IDRs, which are driven by its Viability Rating. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt instrument ratings are broadly sensitive to the same considerations that might affect CBA's Viability Rating. SUBSIDIARY AND AFFILIATED COMPANIES Any change in CBA's ratings is likely to also be reflected in ASB's ratings. The IDRs may be downgraded should Fitch change its view of ASB's role within CBA or if the authorities change their cross-border regulatory approach. The ratings of the senior unsecured securities issued by ASB Finance are sensitive to the same factors as ASB.
The rating actions are as follows: Commonwealth Bank of Australia Long-Term IDR affirmed at 'AA-'; Outlook revised to Negative from Stable Short-term IDR affirmed at 'F1+' Viability Rating affirmed at 'aa-' Support Rating affirmed at '1' Support Rating Floor affirmed at 'A' Senior unsecured long-term debt affirmed at 'AA-' Senior unsecured short-term debt affirmed at 'F1+' Subordinated debt affirmed at 'A+' ASB Bank Limited Long-Term Foreign-Currency IDR affirmed at 'AA-'; Outlook revised to Negative from Stable Short-Term Foreign-Currency IDR affirmed at 'F1+' Long-Term Local-Currency IDR affirmed at 'AA-'; Outlook revised to Negative from Stable Short-Term Local-Currency IDR affirmed at 'F1+' Support Rating affirmed at '1' ASB Finance Limited Senior unsecured long-term debt affirmed at 'AA-' Senior unsecured short-term debt affirmed at 'F1+' Contact: Primary Analyst (CBA) Tim Roche Senior Director +61 2 8256 0310 Fitch Australia Pty Ltd Level 15, 77 King St, Sydney, Australia, 2000 Primary Analyst (ASB) Jack Do Director +61 2 8256 0355 Secondary Analyst (CBA) Jack Do Director +61 2 8256 0355 Secondary Analyst (ASB) Tim Roche Senior Director +61 2 8256 0310 Committee Chairperson Sabine Bauer Senior Director +852 2263 9966 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Bank Rating Criteria (pub. 23 Mar 2018) https://www.fitchratings.com/site/re/10023430 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/site/dodd-frank-disclosure/10029202 Solicitation Status https://www.fitchratings.com/site/pr/10029202#solicitation 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, 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 © 2018 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.