NATIONAL AUSTRALIA BANK LIMITED
Fitch Ratings has upgraded
The Outlook is Stable and reflects our view that NAB has sufficient headroom in its financial metrics to maintain its current rating, even in a scenario that is moderately weaker than our base case.
The upgrade of NAB'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
The Viability Rating (VR) of 'a+' and Government Support Rating (GSR) of 'a' were affirmed at the same time.
Key Rating Drivers
Stronger Junior Debt Buffers: NAB's Long-Term IDR is now above its VR, supported by the build-up of its junior debt buffers to address LAC requirements. The Australian framework requires LAC to be met through existing capital instruments and to be of a sufficient size to reduce the risk of taxpayer funds being required to recapitalise a bank on resolution, thus protecting third-party senior creditors. NAB is close to meeting the final 2026 LAC requirements - Tier 2 capital made up 6.1% of risk-weighted assets (RWAs) at
NAB'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 NAB has sufficient headroom in its financial metrics to maintain its current VR, even in a scenario that is moderately weaker than our base case.
Tepid Economic Growth: We expect high inflation and rapid interest rate hikes in 2022 and 2023 to continue to slow economic growth and an raise unemployment in
Market Position Underpins Ratings: NAB is one of
Robust Risk Management: Several years of remediation expenditure and organisational improvement have strengthened NAB's non-financial risk management, resulting in the removal of the AUD500 million regulatory operational risk capital add-on in
Moderate Rise in Impaired Loans: We expect NAB's stage 3 loan/gross loan ratio to rise in the financial year ending
Earnings to Fall: NAB's operating profit/RWA ratio is likely to fall in FY24, as funding costs and intense competition pressure its net interest margin, system loan growth remains modest and impairment charges rise. We also expect the cost/income ratio to weaken in 2024 on lower net interest income, inflationary pressure and high investment expenditure. Even so, we believe the ratio will remain in the middle of NAB's peer group.
Solid Capital Buffers: NAB's common equity Tier 1 (CET1) ratio of 12.2% at 1H24 remains above the bank's target operating range of 11.0%-11.5%, however, we anticipate the completion of NAB's announced AUD2.7 billion share buyback will see the ratio moderate to levels closer to the range by FY25. The ratio is likely to remain above 12% at FY24 to offset downside risk to asset quality as the economy slows.
Stable Funding Mix: We expect NAB's loans/customer deposit ratio, our core funding and liquidity metric, to remain stable over the next two years, with slowing credit demand offsetting declining deposit growth and a reduction in system liquidity. Funding costs have risen, but remain manageable for the bank. We view NAB's good liquidity management as supporting the funding and liquidity profile.
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
IDRs
The Long-Term IDR would be downgraded if the VR is downgraded or if the regulator no longer envisages NAB's junior debt buffers as sufficient to protect senior creditors in a resolution.
VR
The VR could be downgraded if the OE weakens sharply, resulting in a reassessment of the 'aa-' OE score into the 'a' category and a probable reassessment of most other factors. We believe a downgrade is unlikely, but could occur if inflation remains high, requiring the official cash rate to stay higher for longer than our forecast, leading to a sharper decline in GDP growth and a rapid rise in unemployment.
The ratings may also be downgraded even if the OE score remains unchanged if a combination of the following occurs:
the four-year average of stage 3 loans/gross loans is likely to persist at around or above 2.0% (FY20-FY23: 1.2%)
the four-year average of operating profit/RWAs falls below 1.5% consistently (FY20-FY23: 2.0%)
the CET1 ratio falls to around 10.5% without a credible plan to raise it back above 11.0% (1H24: 12.2%).
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
The IDRs, VR and senior debt ratings may be upgraded if a combination of the following occurs:
The four-year average of operating profit/RWAs is likely to improve to above 3.0% on a sustained basis
NAB commits to maintaining capitalisation at levels consistent with those of more highly rated peers, possibly reflected in a CET1 ratio of above 12.5%.
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
NAB's senior unsecured debt ratings are aligned with the IDRs, in line with Fitch's Bank Rating Criteria.
Subordinated Debt
NAB'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, are present.
Additional Tier 1
NAB's Additional Tier 1 hybrid capital instruments are rated four notches below the anchor rating, the VR. This is 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 are present.
GSR
The GSR reflects a 'Very High' likelihood of support being forthcoming from Australian authorities, if required. NAB is one of
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Short-Term IDR
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-'.
Senior Unsecured Instruments
The senior unsecured instrument ratings will be downgraded if NAB's IDRs are downgraded.
Tier 2 and AT1 Instruments
The Tier 2 and AT1 instrument ratings will be downgraded if NAB'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
Short-Term IDR
The Short-Term IDR cannot be upgraded, as it is at the highest level on Fitch's rating scale.
Senior Unsecured Instruments
The long-term senior unsecured instrument ratings will be upgraded if NAB'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 AT1 Instruments
The Tier 2 and AT1 instrument ratings will be upgraded if NAB'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 NAB'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 NAB, 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).
The asset quality score of 'aa-' has been assigned above the 'a' category implied score for the following adjustment reason: collateral and reserves (positive).
Criteria Variation
Fitch applied a variation from its Bank Rating Criteria by upgrading NAB's Long-Term IDR to one notch above the VR. The criteria states that an uplift can be applied where a banking group's resolution plan envisages that the bank's third-party senior creditors will be protected on failure by a sufficient volume of qualifying junior debt and equity. We have applied the uplift without access to NAB's plan, as
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
NAB has an ESG Relevance Score of '3' for Exposure to Social Impacts. This is 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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