TEXT-Fitch Affirms IBAL at 'BBB-'; Outlook Negative

Sun Dec 2, 2012 10:02pm EST

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(The following was released by the rating agency)

SYDNEY, December 03 (Fitch) Fitch Ratings has affirmed Investec Bank (Australia) Limited's (IBAL) Long-Term Issuer Default Rating (IDR) at 'BBB-'. The Outlook is Negative. A full list of rating actions is provided at the end of this rating action commentary.

IBAL's IDRs and Viability Rating (VR) reflect the bank's continuing improvements in asset quality and operating profitability, adequate capitalisation, and sound funding and liquidity. The ratings also reflect IBAL's small franchise in a highly concentrated banking market in Australia. The ratings further factor in strong ordinary support from its ultimate parent UK-based Investec Bank plc (IBP, 'BBB-'/Negative/'F3').

IBAL's Support Rating reflects a moderate likelihood of extraordinary support from IBP, in case of need. The Negative Outlook on IBAL reflects that of IBP. Given IBAL's strong ties with IBP, negative rating action on the parent would probably result in a similar action on IBAL's VR and IDRs. IBAL's VR could also come under pressure from aggressive loan growth resulting in weakened asset quality, funding and capitalisation.

Positive rating action is unlikely, given the Negative Outlook. IBAL's asset quality has improved significantly following an asset sale and write-off of impaired assets. Its impaired loan ratio fell to 1.06% in the half year ended 30 September 2012 (H1FY13) from 10.5% in H1FY12. Concentration risk by single name and by industry has gradually been reduced. IBAL continues to work through its legacy problem loans, and Fitch takes comfort from the bank's renewed focus on risk appetite and restraint on asset growth.

Fitch expects IBAL's operating profitability to increase on the back of improved asset quality. However, revenue generation is likely to remain under pressure from strong competition for quality assets and deposits. As a result, IBAL's focus on costs and asset quality will be even more crucial in improving its profitability in FY13. IBAL's funding position continues to improve, with strong deposit growth and a reduction in loans resulting in an enhanced loan/deposit ratio of 121%. This ratio compares well with the industry average of around 135%. Wholesale funding declined but still accounted for 38% of total non-equity funding at end-H1FY13. Although liquid assets have declined, the bank has sufficient liquidity to cover wholesale funding maturing within the next 12 months. Capitalisation - reflected in a Tier 1 ratio of 13.4% at end-H1FY13 - remains adequate for IBAL's risk profile.

The ratings of IBAL are listed below:

Long-Term IDR affirmed at 'BBB-'; Outlook Negative Short-Term IDR affirmed at 'F3' Viability Rating affirmed at 'bbb-' Support Rating affirmed at '3' Government guaranteed floating-rate notes affirmed at 'AAA' Subordinated debt affirmed at 'BB+'

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