RPT-Fitch affirms Nelson 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 Nelson Building Society (NBS) at 'BB+'. At the same time, the agency has 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 NBS's IDR, VR and Stable Outlook reflect the society's solid financial profile, which includes a strong funding and liquidity position, an adequate level of capital and robust asset quality. NBS's operating performance has been solid and built on the back of a historically prudent approach to underwriting.
NBS's loan book is fully deposit funded. The society's liquidity position measured by a loans/deposit ratio at 82% at end-March 2013 (FYE13), and has been consistently stronger than peers. Deposit growth accommodated strong loan growth during FY13, with on-balance-sheet liquid assets of NZD83m (22% of total assets) consisting mainly of interbank deposits.
NBS's loan portfolio grew by 14% year on year in FY13, of which 70% originated from the more recently established Takaka and Ashburton branches. A solid regional presence and strong community links allow NBS to compete on its service proposition and help offset pricing pressure in the market. However, as a mutual institution, NBS has limited capital raising options and rapid loan growth has resulted in capital ratios trending lower.
Despite this rapid loan growth the society has maintained a conservative underwriting approach, and this is reflected in its pristine asset quality. At FYE13, NBS had no impaired loans, which remains unchanged year on year, and well secured past due loans had declined by 23% to NZD1.1m.
Intense lending competition could constrain loan growth and profitability in FY14 although to-date NBS has handled this well. Operating profits increased 6% to NZD2.1m as the society benefited from wider net interest margins (FY13: 2.43%) in addition to loan growth.
RATING SENSITIVITIES - IDR AND VR
NBS'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 deteriorated due to its large single-name or geographic concentrations, or because of poorly managed expansion and loan growth. Weaker capitalisation and damage to NBS's reputation and franchise could have a knock on effect on deposits and threaten the society's access to funding, possibly resulting in a rating downgrade.
KEY RATING DRIVERS & RATING SENSITVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR
The downgrade of NBS'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:
Nelson Building Society (NBS):
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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