AUSWIDE BANK LTD
Fitch Ratings has affirmed
The Outlook on the Long-Term IDR is Stable.
Key Rating Drivers
IDRs Driven by VR: The Long-Term IDR of Auswide is driven by its VR, which is in line with the implied VR under Fitch's Bank Rating Criteria. The IDR reflects a business model and risk profile that focuses on low-risk residential mortgages, resulting in relatively stable asset quality and earnings over a sustained period. These factors are offset by the bank's small franchise and market share. The Short-Term IDR of 'F2' is the lower of the two options available at a Long-Term IDR of 'BBB+', as the funding and liquidity score is not sufficiently high to support the higher option; the threshold is a score of at least 'a'.
Concentrated but Stable Business Model: Auswide's national market share of below 0.5% 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 the 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'.
Economic Growth to Slow: Fitch expects high inflation and a rapid increase in interest rates to result in slower economic growth and an increase in unemployment in 2024 in
Modest Weakening in Asset Quality: Fitch expects moderate deterioration in Auswide's loan quality over the next two years, driven by the impact of high interest rates flowing through to Australian mortgage borrowers and a slowing economy. We forecast unemployment to remain relatively low, which means loan weakening should remain manageable for the bank.
Auswide has low exposure to interest-only and investor loans but a high reliance on a broker channel to propel 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.
Moderation in Earnings: Auswide's earnings core metric is likely to contract over the financial year
Adequate Capitalisation: We regard Auswide's capital buffers as adequate for its ratings and believe the common equity Tier 1 (CET1) ratio - 11.4% at FYE23 - will remain broadly stable over the next year. Our revised expectation of moderating loan and risk-weight asset (RWA) growth for Auswide means there is limited pressure on the CET1 ratio. Auswide is listed and has higher capital options and flexibility relative to some of its small bank peers. The capitalisation and leverage score of 'bbb+' is lower than the implied 'a' category score, as we adjust down for Auswide's small absolute size.
Modest Wholesale Funding Reliance: The core metric, loans/customer deposits (FYE23: 128%), is likely to remain broadly stable over FY24. We expect Auswide's loan growth to slow in 2024, which should alleviate prolonged upward pressure on the core metric. Retail deposits are likely to remain Auswide's core funding source, although it is more reliant on wholesale funding than similarly rated domestic peers.
Management of wholesale funding and liquidity appears to be sound. The 'bbb' funding and liquidity score 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
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 sustained deterioration in the bank's financial metrics, possibly reflected in a combination of:
stage 3 loans/gross loans increasing to above 3% for a sustained period (FYE23: four-year average of 0.2%) ;
the operating profit/RWA ratio declining below 0.75% for a sustained period (FYE23: four-year average of 1.8%); or
the CET1 ratio falling below 10% (FYE23: 11.4%) 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 were downgraded to 'BBB' or below.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Positive rating action on Auswide's VR and Long-Term IDR appears 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'.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
Subordinated Debt: 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 Government Support Rating (GSR) of 'no support' assigned to Auswide reflects that there is no reasonable assumption authorities will provide support to the bank, given its small market share and low systemic importance.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
The subordinated debt ratings will move in line with Auswide's VR.
The GSR is at the lowest point on the scale and no negative action is possible.
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.
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).
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
The highest level of 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.
(C) 2023 Electronic News Publishing, source
