ANZ GROUP HOLDINGS LIMITED
Fitch Ratings has upgraded
The Outlook is Stable and reflects Fitch's view that ANZ has sufficient headroom in its financial metrics to maintain its current rating, even in a scenario that is moderately weaker than our base case. Fitch has also upgraded the Short-Term IDR to 'F1+' from 'F1'. The Viability Rating (VR) of 'a+' and Government Support Rating (GSR) of 'a' were affirmed at the same time.
The upgrade of ANZ's Long-Term IDR reflects the bank's build-up of qualifying junior debt instruments and equity to meet loss absorbing capacity (LAC) requirements, which, in conjunction with the
Key Rating Drivers
Junior Debt Buffers: The uplift of ANZ's Long-Term IDR above its VR reflects the junior debt buffers built by the bank to address loss absorbing capacity (LAC) requirements. The Australian framework requires LAC buffers to be met through existing capital instruments.
ANZ's VR is in line with the implied VR and is underpinned by a strong business profile and sound financial profile. The Stable Outlook reflects our view that ANZ has sufficient headroom in its financial metrics to maintain its current VR, even in a scenario that is moderately weaker than our base case.
Economic Growth to Remain Slow: We expect high inflation and interest rates to result in slower economic growth and higher unemployment in
Strong Market Positions: ANZ is
Improved Non-Financial Risk Management: The positive outlook on the risk-profile factor score of 'a+' reflects the steady improvement in non-financial risk management in the past few years. We may raise the score if historical non-financial risk issues are substantially resolved, which may be reflected in the removal of the Australian regulator's AUD500 million operational risk charge issued in 2019 to reflect weaknesses in non-financial risk management. We regard ANZ's underwriting and risk controls as sound and consistent with that of domestic peers.
Asset Quality Weakening: High interest rates and an increase in unemployment as economic growth slows are likely to result in weaker asset quality in 2024. We expect the stage 3 loan/gross loan ratio to remain below 1.5% in that year. The assigned asset quality score of 'aa-' is above the implied 'a' category score to reflect the high level of collateral held over the loan book.
Earnings Challenges: We expect ANZ's earnings to face continued pressure in 2024. The net interest margin is likely to contract as the cash rate stabilises, funding costs rise and competition for loans remains intense. Impairment charges are likely to normalise from very low levels currently, while inflation and high investment expenditure will continue to weigh on expenses.
Sound Capital Buffers: We expect ANZ's common equity Tier 1 (CET1) ratio, which was 13.5% in the financial half-year ended
Stable Funding Profile: We expect ANZ's loan/customer deposit ratio, our core funding and liquidity metric, to modestly weaken over the next two years on slowing deposit growth. Still, we believe ANZ's core metric is likely to remain slightly stronger than peers' over the next two years. ANZ's good liquidity management supports the funding and liquidity profile.
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
LONG-TERM IDR
ANZ's Long-Term IDR would be downgraded if the VR is downgraded. It may also be downgraded if ANZ's junior debt buffers are no longer envisaged by the regulator to be sufficient to protect senior creditors in a resolution event.
VR
ANZ's VR could be downgraded if the operating environment weakens sharply, resulting in a reassessment of the 'aa-' operating environment score into the 'a' category and probably a reassessment of most other factors. We believe a downgrade is unlikely but could occur if inflation remains high, requiring the official cash rate to remain higher for much longer than our forecast, resulting in a much sharper decline in GDP growth and a rapid increase in unemployment.
The ratings may also be downgraded even if the operating environment score remains unchanged if a combination of the following occurs:
the four-year average of stage 3 loans/gross loans is likely to be sustained around or above 2.0% (FY20-FY23: 0.8%);
the four-year average of operating profit/risk-weighted asset (RWA) ratio falls below 1.5% for a sustained period (FY20-FY23: 2.1%);
the CET1 ratio falls to around 10.5%, or the equivalent under
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
ANZ's Long-Term IDR, VR and senior debt ratings may be upgraded if a combination of the following occurs:
the four-year average of the operating profit/RWA ratio is likely to improve to above 3% on a sustained basis;
ANZ commits to maintaining capitalisation at levels consistent with higher-rated peers, possibly reflected in the CET1 ratio above 12.5%, or the equivalent under
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
Short-Term IDR: The Short-Term IDR of 'F1+' maps to the Long-Term IDR of 'AA-'.
Senior Unsecured Instruments: ANZ's senior unsecured debt ratings are aligned with the IDRs, consistent with the baseline approach outlined in Fitch's Bank Rating Criteria.
Tier 2 Instruments: ANZ's subordinated Tier 2 debt is rated two notches below its anchor rating - the VR - for loss severity, with non-performance risk adequately captured by the VR. The point of non-viability for these instruments is at the discretion of the regulator. None of the reasons for alternative notching from the anchor rating, as described in the criteria, is present.
Additional Tier 1 Instruments: ANZ's Additional Tier 1 hybrid capital instruments are rated four notches below the anchor rating - the VR - consistent with the base case in the Bank Rating Criteria. The four notches comprise two notches for loss severity and two notches for non-performance risk to reflect discretionary coupon-skip risks. Conversion of these instruments occurs at the point of non-viability, which is at the regulator's discretion, or if the CET1 ratio falls below 5.125%. None of the reasons for alternative notching is present.
GSR: ANZ's GSR reflects a 'Very High' likelihood of support for senior creditors being forthcoming from Australian authorities if required. This is despite the existence of a resolution regime as this framework does not have statutory or contractual bail-in of senior debt instruments. In addition, ANZ is one of
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Short-Term IDR
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
A downgrade of the Short-Term IDR would require the Long-Term IDR to be downgraded and the funding and liquidity score remaining below 'aa-'.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
The Short-Term IDR cannot be upgraded, as it is at the highest level on Fitch's rating scale.
Senior Unsecured Instruments
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
The senior unsecured instrument ratings will be downgraded if ANZ's IDRs are downgraded.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
The long-term senior unsecured instrument ratings will be upgraded if ANZ's Long-Term IDR is upgraded. The short-term senior unsecured instrument ratings cannot be upgraded, as they are at the highest level on Fitch's rating scale.
Tier 2 and Additional Tier 1 Instruments
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
The Tier 2 and Additional Tier 1 instrument ratings will be downgraded if ANZ's VR is downgraded. The instrument ratings may also be downgraded if any of the reasons for higher notching outlined in Fitch's Bank Rating Criteria apply, although we view this as unlikely to occur.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
The Tier 2 and Additional Tier 1 instrument ratings will be upgraded if ANZ's VR is upgraded. The instrument ratings may also be upgraded if any of the reasons for lower notching outlined in Fitch's Bank Rating Criteria apply, although we view this as unlikely to occur.
GSR
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
A weakening in the propensity of authorities to provide support may result in Fitch lowering ANZ's GSR. However, this appears unlikely. A change in the ability of authorities to provide support is likely to be reflected in a downgrade of
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
The GSR may be upgraded if Australian authorities provide additional, explicit statements of support for domestic systemically important banks, including ANZ, or otherwise provide greater certainty that support would be provided if needed.
VR ADJUSTMENTS
The business profile score of 'aa-' has been assigned above the 'a' category implied score for the following adjustment reason: market position (positive).
Criteria Variation
Fitch applied a variation from its Bank Rating Criteria by upgrading ANZ's Long-Term IDR to rate it one notch above the VR. The criteria states that uplift will likely be applied where a banking group's resolution plan envisages a bank's third-party senior creditors being protected on failure by a sufficient volume of qualifying junior debt and equity. We have applied the uplift without access to a plan for ANZ as the resolution and loss absorbing capacity framework in
Sources of Information
The principal sources of information used in the analysis are described in the applicable criteria.
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
ANZ has an ESG Relevance Score of '3' for Exposure to Social Impacts, above the bank sector default score of '2', because of the ongoing scrutiny of the conduct and practices of
The highest level ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3'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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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