DBRS Ratings Limited (DBRS Morningstar) confirmed the Long-Term ratings of Commonwealth Bank of Australia (CBA or the Bank) at AA (high).
The Short-Term Issuer Rating was confirmed at R-1 (high). The trend on the ratings remains Stable. The Intrinsic Assessment (IA) of the Bank is AA and the Support Assessment is SA2, which reflects DBRS Morningstar's expectation of timely systemic support, given CBA's importance to the financial system in Australia. This results in a one notch uplift to the Issuer Rating from the IA. See a full list of ratings at the end of this press release.
KEY CREDIT RATING CONSIDERATIONS
The confirmation of CBA's ratings reflects its leading banking franchise in its home market of Australia, where it has dominant market shares in home loans and customer deposits, as well as in New Zealand where it is also a leading retail bank. The ratings also take into account the Bank's robust earnings generation, which has recently benefitted from the rise in interest rates as well as the Bank's low cost of risk and solid capital levels. CBA has a conservative risk profile and robust asset quality with very low levels of impaired loans, even though some deterioration has started to feed through reflecting the high cost of living pressures and the higher interest rate environment, particularly in some vulnerable sectors. The ratings also consider that the Bank's funding mix has significantly improved over recent years, supported by strong growth of customer deposits and reduced reliance on wholesale funding.
CREDIT RATING DRIVERS
Given CBA's high rating level an upgrade in the short-term is unlikely. In the longer-term, an upgrade of the ratings would require a significant increase in the Bank's geographical and business diversification whilst maintaining a low risk profile and robust funding and capital position.
A downgrade of the ratings could be driven by a material weakening of profitability and/or asset quality negatively impacting the Bank's capital position. Furthermore, a downgrade of the long-term ratings would occur if, in DBRS Morningstar's opinion, the likelihood of timely systemic support were reduced.
CREDIT RATING RATIONALE
Franchise Combined Building Block (BB) Assessment: Very Strong
With total assets of AUD 1,253 billion at end-June 2023 (FY23), CBA is the leading Australian bank with dominant retail banking market shares in Australia of around 26% in home lending and 27% in household deposits. The Bank also has a meaningful presence in New Zealand, where it operates under the ASB brand and has market shares of around 22% in home loans and 19% in customer deposits. Over the past few years, the Bank has completed several divestments of non-core businesses with the aim of focusing on its core businesses of retail and commercial banking in Australia and New Zealand.
Earnings Combined Building Block (BB) Assessment: Strong
CBA's earnings generation is strong and has benefitted from the impact on the asset side of higher interest rates. CBA reported a return on equity on a statutory basis (ROE) of 14.1%, including discontinued operations, up from 12.9% in FY22. On a statutory basis (and including discontinued operations), the Bank reported net profit after tax of AUD 10,090 million in FY23, down 6% year-on-year (YOY), largely impacted by a loss of AUD 84 million due to the business disposals that were completed in the year. Nonetheless, Net interest income increased by 18% YOY in FY23 to AUD 23,056 million, driven by volume growth in both business and home lending in addition to a higher net interest margin on the back of the significantly higher interest rate environment. The Bank generally maintains a strict cost policy, although operating expenses excluding one offs were up 5% YoY in FY23 largely driven by wage inflation and IT investments. The cost of risk (average gross loans and acceptances) increased YoY in FY23 reflecting the challenging operating environment of higher interest rates and inflation, although it remained very low at 12 bps.
Risk Combined Building Block (BB) Assessment: Very Strong / Strong
CBA has a conservative credit risk profile and asset quality remains solid, partly benefitting from the benign macro-economic environment in Australia which supports low levels of impaired assets. However, the higher interest rate environment and high cost of living are resulting in a moderate increase of Stage 3 loans (up 3% YOY) to AUD 7,437 million at end-FY23, largely reflecting some deterioration in construction, commercial property, retail trade and consumer lending as well some deterioration in the New Zealand home portfolio. The Bank's level of Stage 3 loans however, represented a low 0.80% of total gross loans at end-FY23, broadly in line with end-FY22. The Bank's Stage 2 loans, which are loans that have been classified as having experienced a significant increase in credit risk but are not impaired, represented 17% of total gross loans at end-FY23, up from 13% in FY22, with the increase largely reflecting the implementation of the new APRA's revised capital framework on January 1, 2023. The Bank's exposure to the commercial property sector accounted for a manageable 6.6% of total credit exposures at end-FY23, and the portfolio appears well diversified by assets. This portfolio has not shown a major deterioration and the ratio of troublesome and impaired assets was 1.0% at end-FY23, slightly up from 0.8% from the year before.
Funding and Liquidity Combined Building Block (BB) Assessment: Strong / Good
CBA has a strong funding profile underpinned by a large and stable customer deposit base reflecting its strong deposit market shares both in Australia and New Zealand. Total Customer deposits including certificates of deposits, totalled AUD 864.5 billion at end-FY23 and were up 5% since end-FY22. The Bank's net loan-to-deposit ratio stood at 107% at end-FY23. In addition, CBA's funding profile is well-managed and the Bank has managed to reduce reliance on wholesale funding over the years, supported by consistent growth of customer deposits. Wholesale funding (excluding certificates of deposits), accounted for 21% of total funding at end-FY23 and it is well diversified by instrument, maturity and currency. The Bank has a Reserve Bank of Australia Term Funding Facility (TFF) outstanding of around AUD 32 billion that needs to be repaid in June 2024. DBRS Morningstar does not anticipate any challenges in repaying TFF giving CBA's good liquidity position. CBA reported a LCR of 131% at end-FY23.
Capitalisation Combined Building Block (BB) Assessment: Very Strong / Strong
CBA has a very robust capital position, supported by its consistently strong internal capital generation and despite the Bank generally distributing a high level of earnings to shareholders (cash payout ratio between 70-80%). At end-FY23 the Bank reported an APRA Common Equity Tier 1 (CET1) ratio of 12.2%, up from 11.5% at end-FY22. The improvement in the CET1 ratio at end-FY23 was driven by an uplift of 70 bps from the implementation of the new capital framework effective January 1, 2023.The CET1 ratio is still comfortably above APRA's minimum requirement of 10.25%. The Bank is also required to meet the loss-absorbing capacity (LAC) requirement for D-SIBs, by January 1, 2024. At end-FY23, CBA had AUD 26 billion that qualifies as Tier 2 under current requirements and which are equivalent to 5.5% of RWAs at that date, above the 5% 2024 requirement.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/422089.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental, Social, Governance factor(s) that had a significant or relevant effect on the credit analysis.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (4 July 2023) - https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings
Notes:
All figures are in AUD unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (22 June 2023) https://www.dbrsmorningstar.com/research/415978/global-methodology-for-rating-banks-and-banking-organisations. In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings
in its consideration of ESG factors.
The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies
The sources of information used for this credit rating include Morningstar Inc. and Company Documents, Commonwealth Bank of Australia (CBA) Annual Report 2023, CBA Profit Announcement for the full year ended 30 June 2023, CBA Results Presentation and Investor Discussion Pack FY2023, CBA Fixed Income Investor Discussion Pack FY2023, CBA Climate Report 2023. DBRS Morningstar considers the information available to it for the purposes of providing this credit rating to be of satisfactory quality.
With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.
With Rated Entity or Related Third-Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: NO
DBRS Morningstar does not audit the information it receives in connection with the credit rating process, and it does not and cannot independently verify that information in every instance.
The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar's outlooks and credit ratings are under regular surveillance.
For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.
The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://www.dbrsmorningstar.com/research/422088.
This credit rating is endorsed by DBRS Ratings GmbH for use in the European Union.
Lead Analyst: Maria Rivas, Senior Vice President, Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of Global FIG
Initial Rating Date: 24 January 2005
Last Rating Date: 20 October 2022
DBRS Ratings Limited
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For more information on this credit or on this industry, visit www.dbrsmorningstar.com.
COMMONWEALTH BANK OF AUSTRALIA 
