Commonwealth Bank of Australia outlook revised to positive by Fitch

Investing.com -- Fitch Ratings has revised its outlook on the Commonwealth Bank of Australia (OTC: CMWAY ) (CBA) from stable to positive, while affirming its Long-Term Issuer Default Rating (IDR) at ’AA-’. The rating agency also affirmed the Short-Term IDR at ’F1+’, the Viability Rating (VR) at ’a+’ and the Government Support Rating (GSR) at ’a’, on March 26, 2025.

The revised outlook is attributed to CBA’s consistent strong earnings profile, which, if maintained, could support a higher earnings and profitability score, potentially leading to an upgrade in the VR. Stronger earnings would indicate better internal capital generation, which may also positively influence capitalisation and leverage assessments.

CBA’s Long-Term IDR reflects the build-up of junior debt buffers to address loss absorbing capacity (LAC) requirements, as determined by the Australian regulator. This action aims to reduce the risk of taxpayer funds being used to recapitalize a bank on resolution, thereby protecting third-party senior creditors.

The bank’s VR is one notch below the implied VR, reflecting three of CBA’s four financial profile key rating drivers (KRD) scored at ’a+’. An upward revision of one of these three KRDs could trigger an upgrade of the VR, assuming no other score changes. The earnings and profitability KRD is the most likely to be revised upwards, leading to a potential VR upgrade.

CBA’s operating profit/risk-weighted assets (RWA) ratio is expected to outperform domestic major bank peers, reflecting the bank’s strong retail franchise and leading technology platforms. The ratio was 3.1% in 1HFY25, a slight increase from the ratio reported in FY24. The ratio is forecasted to stay slightly above 3% through to FY27, which underpins the revision of the bank’s earnings and profitability outlook to positive from stable.

Economic conditions in Australia and New Zealand are expected to gradually improve over the next two years, driven by easing monetary policy. However, the lingering effects of high interest rates may lead to a moderate rise in unemployment in the short term, although a sharp deterioration in asset quality is unlikely.

CBA, Australia’s largest bank, accounting for 20% of system assets at the end of 2024, also holds about 18% of New Zealand’s banking system assets through its subsidiary, ASB Bank Limited. The bank’s firm and entrenched market position supports a solid financial profile. This, combined with a simple business model focused on traditional banking products, supports the ’aa-’ business profile score, which is above the implied ’a’ category score.

Credit risk, primarily from its loan portfolio, remains CBA’s main risk. However, the bank’s underwriting standards and risk controls seem sufficient to manage this risk well and should limit deterioration in loan asset quality through the business cycle.

The stage 3 loan/gross loan ratio is expected to weaken slightly through to end-June 2025, from 1% at end-2024, due to the lagged impact of higher interest rates. Rate cuts should result in this ratio declining in FY26, with the four-year average remaining below 1%.

CBA has a strong capital position, particularly given the conservative risk-weighting and capital calculation frameworks in Australia and New Zealand. The common equity Tier 1 (CET1) ratio is forecasted to be around 12% through to FY26, assuming no additional share buybacks.

CBA’s funding and liquidity score has been revised to ’a+’ from ’a’ to reflect the significant improvement in the bank’s funding metrics over more than a decade. The loan/customer deposit ratio is expected to stabilize around current levels, with loan and deposit growth largely matching. CBA’s sound liquidity management and funding plans offset risk associated with the bank’s reliance on offshore wholesale markets for part of its funding.

Negative rating actions could be triggered if the four-year average of its operating profit/RWA ratio is not sustained above 3.0% or if CBA’s junior debt buffers are no longer seen by the regulator as sufficient to protect senior creditors in a resolution event.

Positive rating actions could occur if the four-year average of operating profit/RWAs remains above 3.0% on a sustained basis or if CBA commits to maintaining capitalization at levels consistent with more highly rated peers, possibly reflected in a CET1 ratio of above 12.5%.

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