Fitch Ratings confirmed
The outlook for the long-term IDR is stable.
Main rating factors
IDRs Driven by VR: Auswide’s VR is in line with VR implied by Fitch’s bank rating criteria and reflects a business model and risk profile that focuses on low-risk residential mortgages, which has resulted in relatively stable asset quality and earnings over an extended period. These factors are offset by the bank’s small franchise and market share.
Slower GDP growth: We expect the operating environment for Australian banks to remain stable and in line with the “aa-” factor score despite our forecasts of slower GDP growth in 2023 and lower oil prices. real estate due to a sharp rise in interest rates throughout 2022 to combat high inflation. Fitch believes that low unemployment, combined with cautious loan underwriting, should limit losses for banks.
Concentrated but Stable Business Model: Auswide’s domestic market share of around 0.2% for household mortgages and deposits remains a weakness for VR. The small market position means it has limited competitive advantages and generally acts as a price taker. Auswide’s size and revenue would imply a ‘bb’ category score for the company profile. However, Fitch believes that the bank’s low-risk and stable business model, which focuses on traditional banking activities, compensates for the weaker market position and supports the company profile score of “bbb”.
Modest weakening in asset quality: Fitch expects slowing GDP growth and rising interest rates to cause a manageable weakening in Auswide’s asset quality over the next two years. Low unemployment and the bank’s cautious loan underwriting, which is focused on low-risk mortgages, should continue to support the strong asset quality performance.
Auswide has low exposure to interest only and investor lending, but heavy reliance on a brokerage channel to drive growth. This risk is mitigated by the centralized assessment of mortgage applications. The asset quality factor score of ‘a-‘ is lower than the category’s implied score of ‘aa’, as we apply a downward adjustment to reflect geographic and product concentration.
Earnings stable: Auswide’s core earnings measure is expected to remain broadly stable. We expect operating profit to increase, helped by an expanding net interest margin due to higher rates, but high investment costs and wage pressures should act as an offset. The profit and profitability factor score of ‘bbb+’ is lower than the implied score of the ‘a’ category, as we apply a downward adjustment to reflect low income diversification due to the focus on residential mortgages .
Adequate capital position: We consider Auswide’s capital to be adequate for its ratings and believe that the Common Equity Tier 1 (CET1) ratio – 10.6% at
Modest reliance on wholesale funding: The base measure, customer loans/deposits (Fiscal Year 22: 125%), may weaken slightly if strong loan growth continues, but we expect the ratio to remain favorable to the “bbb” score. Auswide primarily uses deposit funding, although it is more dependent on wholesale funding compared to its domestic counterparts with a similar rating. Wholesale funding and liquidity management appear sound. The funding and liquidity score of “bbb” is lower than the implied score of the “a” category, because we adjust downwards the bank’s deposit structure and the small deposit allowance.
Factors that could, individually or collectively, lead to a negative rating action/downgrade:
IDRS AND VR
IDRs and VR could be downgraded if Auswide’s risk profile were to deteriorate, possibly through a relaxation of underwriting standards or risk controls in the pursuit of growth, although we do not expect this to happen. occur.
Auswide’s ratings could also be downgraded in the event of a sustained deterioration in the bank’s financial metrics, possibly reflected in a combination of:
Phase 3 loans/gross loans increasing to more than 3% for an extended period;
EBIT/RWA down below 0.75% for extended period; Where
the CET1 ratio falling back below 10% without a credible plan to raise it above this level.
A downgrade of the short-term IDR to “F3” would occur if the long-term IDR were downgraded to “BBB” or below.
The Government Support Rating (GSR) is at the lowest point of the scale and no negative action is possible.
Factors that could, individually or collectively, lead to positive rating action/improvement:
IDRS AND VR
A long-term RV and IDR upgrade from Auswide seems unlikely, as it would require a significant improvement in financial profile and business profile without a substantial increase in risk profile.
Although unlikely, the short-term IDR could be upgraded to ‘F1’ if Fitch revises the funding and liquidity score to ‘a’, from ‘bbb’.
Positive action on the GSR would require a significant improvement in market position, so the bank’s market share would be around 1%. A GSR upgrade is unlikely to affect the long-term IDR, which is driven by Auswide’s standalone credit strength.
OTHER DEBT AND ISSUER RATINGS: KEY RATING FACTORS
Subordinated: Auswide’s Tier 2 subordinated debt is rated two notches below its anchor rating, the RV, which is consistent with the base case of Fitch’s bank rating criteria. The two notches below the anchor rating correspond to the severity of the losses, the risk of non-execution being correctly taken into account by the VR. None of the reasons for the alternative notch of the anchor dimension, as described in the criteria, are present.
GSR: The GSR of “ns” reflects our expectation that there is no reasonable assumption of government support due to the bank’s limited systemic importance.
OTHER DEBTS AND ISSUER RATINGS: RATING SENSITIVITIES
Subordinated debt ratings will move in line with Auswide’s RV.
The business profile score “bbb” was assigned above the implicit category score “bb” for the following adjustment reason: business model (positive).
The asset quality rating of “a-” was assigned below the implied category rating of “aa” for the following adjustment reason: concentration (negative).
The earnings and profitability rating of “bbb+” has been assigned below the implicit rating of category “a” for the following adjustment reason: income diversification (negative).
The capitalization and leverage score of “bbb+” was assigned below the implicit score of category “a” for the following adjustment reason: size (negative).
The funding and liquidity score of “bbb” was assigned below the implied score of category “a” for the following adjustment reason: deposit structure (negative).
Best/Worst Case Evaluation Scenario
Global credit ratings of financial institutions and covered bond issuers have a best-case scenario for a rating upgrade (defined as the 99th percentile of rating transitions, measured in the positive direction) of three notches out of a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured negatively) of four notches over three years. The full range of best-case and worst-case credit ratings for all rating categories ranges from ‘
REFERENCES FOR A MOSTLY MATERIAL SOURCE CITED AS A KEY SCORING FACTOR
The main sources of information used in the analysis are described in the applicable criteria.
Unless otherwise specified in this section, the highest level of environmental, social and governance (ESG) credit materiality is a score of “3”. This means that ESG issues are credit-neutral or have minimal impact on the entity’s credit, either because of their nature or the way they are managed by the entity. For more information on Fitch’s ESG materiality scores, visit www.fitchratings.com/esg.
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