Fitch Revises Outlook on Auswide Bank's IDR to Stable; Affirms at 'BBB+'

(The following statement was released by the rating agency) Fitch Ratings-Sydney-28 January 2021: Fitch Ratings has revised the rating Outlook on Auswide Bank Ltd to Stable from Negative and affirmed the Long-Term Issuer Default Rating (IDR) at 'BBB+'. At the same time, Fitch affirmed Auswide's other ratings. A full list of rating actions is at the end of this rating action commentary. Key Rating Drivers IDRS AND VIABILITY RATING Auswide's IDRs are driven by its Viability Rating (VR), which reflects the bank's sound risk management and satisfactory profitability. The revision of the Outlook to Stable reflects Fitch's expectation that Auswide has adequate headroom in its current rating to withstand the anticipated weakening in asset quality and profitability over the next two years due to the impact from the pandemic. The relatively good results in containing the Covid-19 pandemic in Australia also support future economic recovery and reduce downside risks to the financial profile of Auswide. Auswide's asset quality is likely to deteriorate moderately over the next two years with the gradual unwinding of support measures. Auswide's stage 3 loans/gross loans ratio, Fitch's core metric for asset quality, remained steady at 0.4% in the financial year ended June 2020 (FY20). We expect this ratio to start rising in FY21, although substantial weakening appears unlikely. Auswide's current deferred loan balance has significantly reduced from the peak and the bank's exposures to high-risk industries are moderate. The factor outlook has been revised to stable as our base case deterioration would be insufficient to warrant a lower asset quality score and downside uncertainty has been reduced. Auswide's profitability is likely to remain resilient in the next 12 months, benefiting from steady earnings and robust cost management. Nonetheless, some profitability headwinds will continue over the medium term, including low interest rates, and ongoing investments in compliance and digital capabilities. Auswide's provision level appears reasonable and we expect a moderate level of impairment charges during FY21. We believe there is adequate buffer at Auswide's current score for earnings and profitability to weather a deterioration that is more severe than our base case expectations. Therefore, the factor outlook has been revised to stable. Fitch expects Auswide's common equity Tier 1 (CET 1) capital ratio to remain generally stable in the next two years. The bank's CET1 ratio stood at 11.1% at June 2020, which was at the lower end of what we would expect for a capitalisation and leverage score in the 'a' range. The current score of 'bbb+' takes into account the small absolute size of the bank's capital. Weakening in asset quality and profitability could impact Auswide's capital ratios over the next two years. However, we believe the bank has sufficient buffers to remain within its current score over the short term, and, therefore, have maintained the stable factor outlook. Fitch expects Auswide's funding profile to continue improving moderately over the next 12 months driven by strong deposit growth, which reflects the high level of liquidity in the banking system. However, the bank's reliance on wholesale funding should remain higher than that of similarly rated domestic peers. Auswide's loan/deposit ratio declined to 123% by end-June 2020 (from 130% at end-June 2019) and may further improve in 2021. Liquidity management of the bank appears to be sound. Auswide holds sufficient liquid assets to cover upcoming maturities and has access to other funding sources, including undrawn warehouse facilities and central bank repo facilities. The factor score remains unchanged at 'bbb' with a stable outlook. 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. Australia has controlled the spread of the coronavirus well, resulting in the economic outlook strengthening, although downside risk due to additional outbreaks and associated lockdowns remains. Fitch's base case, as outlined in the Global Economic Outlook - December 2020 (https://www.fitchratings.com/site/re/10145707) is for Australian GDP to contract by 2.8% in 2020, before recovering by 3.8% in 2021. Under this scenario, we are likely to revise the factor outlook to stable in 2021. Auswide's Short-Term IDR of 'F2' is at the lower of the two options available at a Long-Term IDR of 'BBB+', as the funding and liquidity score is not high enough to support the higher option (the threshold is a score of at least 'a'). SUPPORT RATING AND SUPPORT RATING FLOOR Auswide's Support Rating and Support Rating Floor reflect Fitch's view that while support from the authorities is possible, it cannot be relied upon due to the bank's small market share and low systemic importance. SUBORDINATED DEBT Auswide'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 AND VIABILITY RATING Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade: Auswide's ratings may be downgraded if there is a material deterioration in the bank's financial metrics, including a combination of: - Stage 3 loans/gross loans increasing to above 4% on a sustained basis - Operating profit/risk-weighted assets declining below 1% on a sustained basis - CET1 ratio falling below 10% without a creditable plan to raise it back above this level Auswide's ratings are also sensitive to any weakening in its risk appetite, which may be evident in more aggressive underwriting standards or looser risk controls in order to seek asset growth and improve the bank's franchise. However, this appears unlikely in the current environment. Auswide's Short-Term IDR may be downgraded if its Long-Term IDR is downgraded to 'BBB-' or below, or a combination of the Long-Term IDR downgraded to 'BBB' and funding and liquidity score remains below 'bbb+'. Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade: Positive rating action on Auswide's VR and IDRs is unlikely as it would require a significant improvement in its company profile and strengthening of a number of financial metrics. It also reflects the bank's weaker funding profile relative to peers. Upside potential for Auswide's Short-Term IDR is also limited. However, an upgrade of the Long-Term IDR to 'A' or higher, or the funding and liquidity score being assessed at 'a' or higher would result in a Short-Term IDR of 'F1'. SUPPORT RATING AND SUPPORT RATING FLOOR Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade: Auswide's Support Rating and Support Rating Floor are at the lowest points on the respective scales and no negative action is possible. Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade: Positive action on the Support Rating and Support Rating Floor would require a significant change to our assessment on the propensity of the authorities to provide support to small banks. An upgrade of these ratings is unlikely to affect Auswide's Long-Term IDR, which are currently driven by its standalone credit strength and is multiple categories above the Support Rating Floor. SUBORDINATED DEBT Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade: Auswide's Tier 2 debt ratings are sensitive to the same factors that may affect its Viability Rating. The Tier 2 debt ratings would be downgraded if Auswide's Viability Rating is downgraded. Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade: An upgrade of Auswide's Viability Rating could be reflected in the rating on 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 Auswide Bank Ltd; Long Term Issuer Default Rating; Affirmed; BBB+; Rating Outlook Stable ; Short Term Issuer Default Rating; Affirmed; F2 ; Viability Rating; Affirmed; bbb+ ; Support Rating; Affirmed; 5 ; Support Rating Floor; Affirmed; NF ----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 Jack Do, Director +61 2 8256 0355 Committee Chairperson Heakyu Chang, Senior Director +822 3278 8363 Media Relations: Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@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/10150857) Solicitation Status (https://www.fitchratings.com/site/pr/10150857#solicitation-status) Additional Disclosures For Unsolicited Credit Ratings (https://www.fitchratings.com/site/pr/10150857#unsolicited-credit-ratings-disclosures) Endorsement Status (https://www.fitchratings.com/site/pr/10150857#endorsement-status) Endorsement Policy (https://www.fitchratings.com/site/pr/10150857#endorsement-policy) ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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