WESTPAC BANKING CORPORATION
Fitch Ratings has upgraded
The Outlook is Stable. 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 Westpac'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 Westpac's Long-Term IDR above its VR reflects the build-up of junior debt buffers to address large Australian banks' LAC requirements. The framework requires LAC buffers to be met through existing capital instruments.
Westpac's VR is underpinned by its strong business profile, which supports the bank's risk profile and ultimately its sound financial performance. The Stable Outlook reflects Fitch's view that Westpac has headroom in its financial metrics to maintain the current VR, even in a scenario that is moderately weaker than our base case.
Economic Growth to Remain Slow: We expect high inflation and rapid interest rate increases in 2022 and 2023 to result in slow economic growth and an increase in unemployment in
Strong Franchise in Key Markets: Westpac is
Improved Non-Financial Risk-Management: Westpac's risk profile factor score of 'a+' with a positive outlook reflects improvements in the bank's risk framework due to its non-financial risk remediation programme. The score remains lower than both the business-profile and asset-quality scores, but could be aligned if the improvements made over the last three years are sustained. This could be reflected by the removal of
Asset Quality to Weaken: We expect Westpac's stage 3 loan/gross loan ratio to increase during the financial year ending
Earnings Headwinds into FY25: We expect Westpac's core earnings metric, the operating profit/RWA ratio, to fall below 2% in FY24, from 2.2% in FY23, as funding costs and competition for loans put pressure on the net interest margin, system loan growth remains modest and operating expenses rise. Many of these headwinds are likely to persist into FY25 and we expect the core metric to remain below 2% as a result.
Capital Ratios to Moderate: Announced capital management plans mean Westpac's common equity Tier 1 (CET1) ratio should moderate to around 12% by FYE25, from the 12.55% reported at
Stable Funding Profile: We expect Westpac's loan/customer deposit ratio, our core funding and liquidity metric, to remain relatively stable over the next two years, with a decline in system loan growth offsetting slower deposit growth. Westpac'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
Westpac's Long-Term IDR would be downgraded if the VR is downgraded. It may also be downgraded if Westpac's junior debt buffers are no longer envisaged by the regulator to be sufficient to protect senior creditors in a resolution event.
VR
Westpac's VR could be downgraded if the OE weakens sharply, resulting in a reassessment of the 'aa-' score into the 'a' category, as this would probably result in a reassessment of most other factors. We believe this 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 deceleration in GDP growth and a rapid increase 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 be sustained around or above 2.0% (FY20-FY23: 1.2%);
the four-year average of operating profit/RWAs falls below 1.5% consistently (FY20-FY23: 1.8%);
the CET1 ratio falls to around 10.5% without a credible plan to raise it back above 11.0% (
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
LONG-TERM IDR and VR
Westpac's Long-Term IDR and VR 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% on a sustained basis;
Westpac commits to maintaining capitalisation at levels consistent with that of more highly rated peers, possibly reflected in a CET1 ratio that is 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: Westpac's senior unsecured debt ratings are aligned with the IDRs, in line with Fitch's Bank Rating Criteria.
Tier 2 Instruments: Westpac'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: Westpac'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: Westpac'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, Westpac 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 Westpac's IDRs are downgraded.
Tier 2 and Additional Tier 1 Instruments
The Tier 2 and Additional Tier 1 instrument ratings will be downgraded if Westpac'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 Westpac'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
The Tier 2 and Additional Tier 1 instrument ratings will be upgraded if Westpac'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 authorities' propensity to provide support may result in Fitch lowering Westpac'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 Westpac, 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 Westpac'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 Westpac, as the resolution and loss absorbing capacity framework in
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
Westpac has an ESG Relevance Score of '3' for Exposure to Social Impacts, above the bank sector default score of '2', due to 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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