AUSWIDE BANK LTD
Fitch Ratings has affirmed
The Outlook on the Long-Term IDR is Stable.
Key Rating Drivers
IDRs Driven by VR: Auswide's VR is in line with the implied VR under 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 a sustained period. These factors are offset by the bank's small franchise and market share.
Slowing GDP Growth: We expect the operating environment for Australian banks to remain stable and consistent with the 'aa-' factor score despite our expectation for slowing GDP growth in 2023 and softening house prices as a result of a sharp rise in interest rates throughout 2022 to tackle high inflation. Fitch believes that low unemployment, combined with conservative loan underwriting, should limit losses for the banks.
Concentrated but Stable Business Model: Auswide's national market share of around 0.2% for mortgages and household deposits remains a weakness for the VR. The small market position means it has limited competitive advantages and generally acts as a price taker. Auswide's size and earnings would imply a 'bb' category score for business profile. However, Fitch believes the bank's low-risk and stable business model, which focuses on traditional banking activities, offsets the weaker market position, and supports the business profile score of 'bbb'.
Modest Weakening in Asset Quality: Fitch expects slowing GDP growth and rising interest rates to result in a manageable weakening in Auswide's asset quality over the next two years. Low unemployment and the bank's conservative loan underwriting, which focuses on lower-risk mortgages, should continue to support sound asset-quality performance.
Auswide has low exposure to interest-only and investor loans, but a high reliance on a broker channel to drive growth. This risk is mitigated by centralised assessment of mortgage applications. The asset-quality factor score of 'a-' is below the category implied score of 'aa', as we apply a downward adjustment to reflect geographic and product concentration.
Stable Earnings: Auswide's earnings core metric should remain broadly stable. We expect operating income to rise, assisted by an expanding net interest margin from rising rates, but high investment costs and wage pressures are likely to act as an offset. The earnings and profitability factor score of 'bbb+' is below the implied 'a' category score, as we apply a downward adjustment to reflect low revenue diversification due to the heavy focus on residential mortgage lending.
Adequate Capital Position: We regard Auswide's capital as adequate for its ratings and believe the common equity Tier 1 (CET1) ratio - 10.6% at
Modest Wholesale Funding Reliance: The core metric, loans/customer deposits (FYE22: 125%), could weaken modestly if strong loan growth continues, but we expect the ratio to remain supportive of the 'bbb' score. Auswide uses mainly deposit funding although it is more reliant on wholesale funding relative to similarly rated domestic peers. Management of wholesale funding and liquidity appear to be sound. The funding and liquidity score of 'bbb' is lower than the implied 'a' category score, as we adjust down for the bank's deposit structure and small deposit franchise.
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
IDRS AND VR
The IDRs and VR could be downgraded if Auswide's risk profile were to deteriorate, possibly through a loosening of underwriting standards or risk controls in the pursuit of growth, although we do not expect this to occur.
Auswide's ratings could also be downgraded if there is a sustained deterioration of the bank's financial metrics, possibly reflected in a combination of:
stage 3 loans/gross loans increasing to above 3% for a sustained period;
operating profit/risk-weighted assets declining below 0.75% for a sustained period; or
the CET1 ratio falling below 10% without a credible plan to increase it back above this level.
A downgrade of the Short-Term IDR to 'F3' would occur if the Long-Term IDR was downgraded to 'BBB' or below.
GSR
The Government Support Rating (GSR) is at the lowest point on the scale and no negative action is possible.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
IDRS AND VR
An upgrade in Auswide's VR and Long-Term IDR appear unlikely, as it would require a significant improvement in the financial profile and business profile without a substantial increase in the risk profile.
While not probable, the Short-Term IDR could be upgraded to 'F1' if Fitch revised the funding and liquidity score to 'a', from 'bbb'.
GSR
Positive action on the GSR would require a significant improvement in market position such that the bank's market share was around 1%. An upgrade of the GSR is unlikely to affect the Long-Term IDR, which is driven by Auswide's standalone credit strength.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
Subordinated: Auswide's subordinated Tier 2 debt is rated two notches below its anchor rating, the VR, which is consistent with the base case in Fitch's Bank Rating Criteria. The two notches below the anchor rating are for loss severity, with non-performance risk captured adequately by the VR. None of the reasons for alternative notching from the anchor rating, as described in the criteria, is present.
GSR: The GSR of 'ns' reflects our expectation that there is no reasonable assumption of support being forthcoming from the state because of the bank's limited systemic importance.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
The subordinated debt ratings will move in line with Auswide's VR.
VR ADJUSTMENTS
The business profile score of 'bbb' has been assigned above the 'bb' category implied score for the following adjustment reason: business model (positive).
The asset quality score of 'a-' has been assigned below the 'aa' category implied score for the following adjustment reason: concentration (negative).
The earnings and profitability score of 'bbb+' has been assigned below the 'a' category implied score for the following adjustment reason: revenue diversification (negative).
The capitalisation and leverage score of 'bbb+' has been assigned below the 'a' category implied score for the following adjustment reason: size (negative).
The funding and liquidity score of 'bbb' has been assigned below the 'a' category implied score for the following adjustment reason: deposit structure (negative).
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
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
Unless otherwise disclosed in this section, the highest level of environmental, social and governance (ESG) credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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