(The following was released by the rating agency)
SYDNEY, December 17 (Fitch) Fitch Ratings has affirmed Australia-based Bank of Queensland's (BOQ) Long- and Short-Term Issuer Default (IDR) ratings at 'BBB+' and 'F2' respectively. The Outlook on the Long-Term IDR is Stable. At the same time, the agency affirmed BOQ's Viability Rating (VR) at 'bbb+' and Support Rating at '3'.
The ratings reflect BOQ's improved capitalisation, continued reduction in wholesale funding and solid liquidity. They also factor in its sharp asset quality deterioration which impacted the bank's profitability in the financial year ended 31 August 2012 (FY12), and concentration risk by region and product due to its small size and limited franchise.
BOQ's ratings could be downgraded if asset quality continues to deteriorate sharply and erodes its solid capitalisation. Its asset quality and profitability are also more susceptible to deterioration than peers due to its larger exposure to Queensland whose economy, excluding mining, continues to perform weakly.
The bank's ratings could also come under pressure from a weakening of its liquidity position or from a material increase in its reliance on wholesale markets. BOQ's new management has taken steps to strengthen the bank' balance sheet but positive rating action will depend on the bank's ability to achieve recurrent healthy profitability while improving asset quality and maintaining solid capitalisation.
Asset quality remains a weakness. A review conducted by newly appointed Chief Executive Officer in H112 uncovered asset quality problems in BOQ's commercial property portfolio, leading to weaker impaired loan ratio at 1.52% at FYE12 (FYE11: 1.39%).
In response, the bank increased its provisioning, changed underwriting practices, and tightened underwriting criteria. A portfolio of the four largest non-performing exposures totalling AUD156m was sold in H212. However, weaker economic conditions in its key markets, including increasing unemployment, impacted BOQ's retail portfolio in H212.
BOQ's capitalisation was significantly boosted by a capital issue of AUD450m following the H112 loss. As a result of the additional capital and slower risk-weighted asset growth, BOQ's regulatory Tier 1 capital ratio and Fitch Core Capital ratio improved considerably to 9.47% and 10.33% respectively in FY12 from 8.37% and 8.39% in FY11.
A low credit growth environment, combined with fierce competition for deposits and loans, is likely to place pressure on BOQ's revenue generation in FY13. Therefore cost management is likely to be the bank's focus. Impairment charges will most probably decline, reflecting the one-off nature of the charges in H112. In FY12 BOQ continued to reduce its reliance on wholesale funding. Customer deposits increased 14%, improving the bank's loan/deposit ratio to 139% (FY11: 153%).
Wholesale funding was reduced by 10% to represent a third of BOQ's funding at FYE12. The funding profile is well diversified by instrument and maturity. Liquidity is solid, with liquid assets covering wholesale debt maturing within 12 months. BOQ's Support Rating and Support Rating Floor reflect a moderate potential for support from the government, in case of need, due to the bank's modest market share in Australia.
The Support Rating is sensitive to any change in assumptions around the propensity or ability of the Australian sovereign to provide timely support to the bank.