Credit rating agency Fitch revises big Australasian banks' credit ratings to stable from negative except for on-the-block Westpac NZ

Credit rating agency Fitch has revised the outlook on its credit ratings for the big four Australian banks, and three of their New Zealand subsidiaries, to stable from negative. The odd one out is Westpac NZ, whose Aussie parent is reviewing its ownership.

Fitch's revision reflects a "meaningful and sustainable improvement" in the economic prospects in the banks’ core markets since the onset of Covid-19, Fitch says, and points to less downside risk to their operating environment.

"We also revised the Outlook on the Long-Term Issuer Default Ratings of the New Zealand subsidiaries of three of the four banks to Stable from Negative, reflecting our continued view of the extremely high likelihood of support for these entities from their respective parents should it be required. Westpac New Zealand Limited's Long-Term Issuer Default Ratings and senior debt ratings were not considered as part of this review and remain on Rating Watch Negative pending a decision from its Australian parent, Westpac Banking Corporation, on its position within the group," Fitch says.

Fitch has an "A+" rating on the big four Aussie banks, and the same rating for their Kiwi subsidiaries. See credit ratings explained here.

Here's Fitch's statement.

Improved Environment Supports Stable Outlook for Large Australian Banks

Fitch Ratings' revision of the Outlook to Stable from Negative on the ‘A+’ Long-Term Issuer Default Ratings (IDRs) of Australia's four largest banking groups reflects a meaningful and sustainable improvement in the economic prospects in the banks’ core markets since the onset of Covid-19. This also points to less downside risk to the operating environment. Specific details of the actions can be found in the individual Rating Action Commentaries published on 12 April 2021.

We also revised the Outlook on the Long-Term IDRs of the New Zealand subsidiaries of three of the four banks to Stable from Negative, reflecting our continued view of the extremely high likelihood of support for these entities from their respective parents should it be required. Westpac New Zealand Limited's Long-Term IDRs and senior debt ratings were not considered as part of this review and remain on Rating Watch Negative pending a decision from its Australian parent, Westpac Banking Corporation, on its position within the group. The entities affected by this action are:

Australia and New Zealand Banking Group Limited
-ANZ Bank New Zealand Limited
-Senior debt issued by ANZ New Zealand (Int'l) Limited
Commonwealth Bank of Australia
-ASB Bank Limited
-Senior debt issued by ASB Finance Limited
National Australia Bank Limited
-Bank of New Zealand
-Senior debt issued by BNZ International Funding Limited
Westpac Banking Corporation

Fitch revised the outlook on the operating environment score for Australian banks (‘aa-‘) to stable from negative as part of this action. We expect Australian GDP to recover to end-2019 levels by mid-2021, and by 4.7% in 2021 following a 2.4% contraction in 2020. This outcome is much stronger than the 5% decline we had expected in April 2020, and we now believe that the operating environment will remain consistent with the current score even under a scenario that is weaker than our base case.

The better-than-expected economic performance in 2020 and improved outlook for 2021 mean risks to asset quality have also eased, and we now expect performance to remain consistent with the current factor score of ‘a+’. We have revised the asset-quality outlook to stable from negative as a result. We still expect some deterioration in asset-quality metrics during 2021 as support measures provided by authorities and the banks themselves are unwound, but not for the stage 3 loans/gross loans ratios to weaken sufficiently to warrant a lower asset-quality score. Stage 3 loans ranged from 0.8% to 1.6% of gross loans at the most recent reporting period for the large Australian banks.

This is likely to result in a further write-back of provisions raised by the banks in 2020, which in turn should support earnings in 2021 - both ANZ and Westpac have already announced some release. However, we expect earnings pressure to remain into the medium term, with low rates likely for several years. Capital positions improved significantly during 2020, due partly to restrictions on dividend payments, and we expect banks to manage ratios back toward management targets through shareholder returns later in 2021. Funding and liquidity positions have also improved as deposits grew strongly through 2020, although we expect the system to retain some reliance on offshore wholesale funding in the longer term.

Fitch reviewed the impact of the improved operating environment on the ratings of the four large Australian banks ahead of the rest of the portfolio, as combined they account for over 70% of banking system assets. We will review the impact on the remaining rated Australian banks in the near future, with a focus on those with a negative outlook on their Long-Term IDRs.