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Fitch Assigns Westpac's USD1.25 Billion AT1 Notes 'BBB' Rating
September 13, 2017 / 6:45 AM / in 2 months

Fitch Assigns Westpac's USD1.25 Billion AT1 Notes 'BBB' Rating

(The following statement was released by the rating agency) SYDNEY, September 13 (Fitch) Fitch Ratings has assigned Westpac Banking Corporation's (AA-/Stable/aa-) USD1.25 billion fixed-rate resetting perpetual subordinated contingent convertible securities a rating of 'BBB'. The notes qualify as additional Tier 1 securities for regulatory capital purposes. Westpac can redeem all the notes on each reset date subject to the approval of the Australian Prudential Regulation Authority (APRA). The first reset date will be 21 September 2027 and additional reset dates will be every five years thereafter. KEY RATING DRIVERS The notes are rated five notches below Westpac's Viability Rating of 'aa-', with two notches for loss severity and three notches for incremental non-performance risk, in line with Fitch's approach to rating hybrid capital securities. The two notches for loss severity reflect that the notes can be converted to ordinary equity of Westpac before the point of non-viability. The notes have loss absorption features in the form of a capital trigger and a point of non-viability trigger. The capital trigger requires the notes to convert, in part or in full, to ordinary equity if Westpac's common equity Tier 1 (CET1) ratio falls to or below 5.125% at Level 1 or 2. Level 1 capital requirements are set at a standalone level, while Level 2 captures the consolidated entity, excluding some businesses, such as insurance, trustee, non-financial and securitisation operations. The non-viability trigger requires the notes to convert, in part or in full, to ordinary equity of Westpac if the bank receives written notice from APRA that without conversion the bank would be non-viable in the regulator's opinion. The notes must convert in full if APRA determines that without a public-sector capital injection, or equivalent support, Westpac would be non-viable. The notes will be written-off if the conversion cannot be effected within five ASX business days of the trigger event. Notching for incremental non-performance risk reflects the notes' fully discretionary non-cumulative interest payments, which Fitch views as the most easily activated form of loss absorption. Interest payments are subject to management discretion as well as; Westpac not breaching its regulatory capital requirements under the prudential standards at the time of the interest payment at Level 1 or 2; Westpac not becoming, or being likely to become, insolvent as defined in the Corporations Act 2001; and APRA not objecting to the payment. Fitch's criteria allow for wider notching for incremental non-performance if Fitch believes there is a heightened probability of coupon omission. Fitch does not think this is likely for Westpac, as the bank has strong and proven capital-flexibility, a solid buffer above regulatory minimum capital requirements and small Additional Tier 1 coupon payments as a portion of Westpac's profit. Westpac reported a Level 1 CET1 ratio of 9.9% and a Level 2 ratio of 10.0% as at end-June 2017, 190bp and 200bp, respectively, above the bank's Pillar 1 minimum of 8.0%. Tier 1 and total capital buffers at Level 1 and 2 were higher. Fitch expects the bank to maintain a management buffer of about 100bp over the regulatory minimum, even after the Australian regulator finalises its revisions to the capital adequacy framework. Westpac has solid profitability against that of many international peers and can quickly increase its internal capital generation by placing a discount on the dividend reinvestment plan. Alternatively, the bank could issue ordinary shares to the market, cut its dividend payout, restrict risk-weighted asset growth or undertake asset sales to improve capitalisation if needed. If an interest payment on the notes is cancelled, Westpac cannot pay an ordinary dividend until the next coupon is paid, subject to certain exceptions. Fitch believes this, combined with the small size of the coupon payments for Additional Tier 1 instruments relative to ordinary dividends, creates a strong incentive for Westpac to make the interest payments, even if it enters the capital conservation buffer. Westpac paid about AUD589 million in coupon payments on additional Tier 1 and 2 instruments in the financial year to 30 September 2016 (equivalent to 7.9% of net-profit after tax), while it paid dividends totalling AUD6.3 billion on ordinary shares. RATING SENSITIVITIES The notes' ratings are sensitive to movements in Westpac's Viability Rating. For more details on Westpac's ratings and credit profile, see the rating action commentary, <a href="https://www.fitchratings.com/site/pr/1020141 ">Fitch Affirms Australia's Four Major Banks, dated 6 March 2017. Contact: Primary Analyst Tim Roche Senior Director +61 2 8256 0310 Fitch Australia Pty Ltd Level 15, 77 King St, Sydney NSW 2000 Secondary Analyst Jack Do Director +61 2 8256 0355 Committee Chairperson Jonathan Lee Senior Director +886 2 8175 7601 Date of Relevant Rating Committee: 30 August 2017 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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