RPT-Fitch Affirms Wairarapa Building Society at 'BB+'
(Repeat for additional subscribers)
Aug 20 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) of Wairarapa Building Society (WBS) at 'BB+'. At the same time, the agency downgraded the bank's Support Rating to '5' from '4', and the Support Rating Floor to 'NF' from 'B+. The Outlook is Stable. A full list of rating actions can be found at the end of this commentary.
KEY RATING DRIVERS - IDR AND Viability Rating (VR)
The affirmation of WBS's IDR, VR and Stable Outlook reflect the society's improved operating performance, sound asset quality as a result of prudent underwriting, good funding, modest on-balance-sheet liquidity positions and adequate capitalisation.
Intense lending competition could constrain loan growth and profitability in the financial year 2014 (FY14) although to-date WBS appears to have handled these pressures well. Pre-impairment operating profits increased by 29% to NZD347,000 in FY13 year on year as the society benefited from wider net interest margins (FY13: 2.12%) and modest loan growth of 3%. Moreover, new loan growth has been solid through the first two months of FY14.
WBS's conservative underwriting approach is reflected in its sound asset quality despite significant single name concentration. At FYE13, WBS had no impaired loans, which remains unchanged year on year, and well secured past due loans had declined by 17% to NZD1.1m (1.3% of net loans).
WBS's loan book is fully deposit funded and the society's loans/deposit ratio was a solid 100% at FYE13. The society's liquidity position was well in excess of its trust deed requirements at FYE13, although it consisted mainly of NZD18m in committed facilities. On-balance-sheet liquidity was a more modest NZD6.7m, and consisted of interbank deposits.
Capital ratios are high relative to peers but Fitch views this as appropriate given WBS's small absolute capital base, limited capital raising options, and large loan concentrations. Measured by non-risk-adjusted total tangible equity/total tangible assets, capitalisation increased slightly to 15.1% at FYE13 from 14.9% at FYE12.
RATING SENSITIVITIES - IDR AND VR
WBS's IDR and VR are unlikely to be upgraded due to the society's small absolute capital base, small domestic franchise, and geographic and large-loan concentrations.
A negative rating action could occur if asset quality unexpectedly declined leading to capital erosion. Damage to WBS's franchise from a weaker capital position or operational risks could also result in a rating downgrade. In addition, any reputational damage could in turn impact deposits and threaten the society's liquidity and access to funding.
KEY RATING DRIVERS & RATING SENSITVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR
The downgrade of WBS's Support Rating and Support Rating Floor reflect the introduction of the Open Bank Resolution Scheme (OBR) from 1 July 2013 and the reduced propensity of the New Zealand government to support. The OBR allows for the imposition of losses on senior creditors to make up capital shortfalls where a deposit taking institution has failed. The existence of a legal framework in the agency's view makes it easier for the authorities to impose losses than was previously the case.
The Support Rating and Support Rating Floor are sensitive to any change in assumptions around the propensity or ability of the New Zealand government to provide timely support to the bank.
The rating actions are as follows:
Wairarapa Building Society (WBS):
Long-Term IDR affirmed at 'BB+'; Outlook Stable;
Short-Term IDR affirmed at 'B';
Local Currency Long-Term IDR affirmed at 'BB+'; Outlook Stable;
Local Currency Short-Term IDR affirmed at 'B';
Viability Rating affirmed at 'bb+';
Support Rating downgraded to '5'; and
Support Rating Floor downgraded to 'NF'.
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