Fitch Assigns New Zealand's Co-operative Bank 'BBB-'/Stable

Wed Dec 4, 2013 6:59pm EST

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(The following statement was released by the rating agency) SYDNEY, December 04 (Fitch) Fitch Ratings has assigned New Zealand's Co-operative Bank (Co-op) Long- and Short-Term Issuer Default Ratings (IDR) of 'BBB-' and 'F3' respectively. The Outlook on the Long-Term IDR is Stable. A full list of rating actions can be found at the end of this commentary. KEY RATING DRIVERS - IDRs AND VIABILITY RATING (VR) Co-op's IDRs and VR reflect the bank's robust capitalisation, sound funding, solid and stable asset quality, and simple business model, which are offset by modest profitability and a limited domestic franchise. Co-op's profitability is likely to improve as the bank continues to implement its five year strategic plan. The plan should help address the bank's weak cost efficiency by better utilising current resources and expanding the product set to grow revenue. However, this may take some time to flow through to profitability. Therefore, profitability is likely to continue to lag domestic peers in the financial year ended 31 March 2014 (FY14). Co-op's capital position offsets some of the risk associated with the low profitability. Capitalisation is strong relative to peers, both on a risk weighted and un-risk weighted basis. The Fitch core capital (FCC) ratio was 14.8% at FYE13. This is unlikely to deteriorate materially despite the bank's growth ambitions. However, as Co-op's access to common equity is limited as a mutual, a material deterioration in its capital position would be viewed negatively from a rating perspective. Asset quality is solid, reflecting the bank's sound approach to underwriting loans. Mortgages dominate the loan book, with exposures well spread throughout New Zealand. Geographic and single name concentrations are very low as a result. Planned growth in the buoyant Auckland property market is unlikely to materially increase risks given the bank's cautious expansion. Provisioning levels are adequate. Funding is dominated by retail deposits, with only limited (5% of total funding) wholesale funding in the form of a bank warehouse (NZD17m drawn at FYE13) and a Residential Mortgage Backed Securities deal (NZD44m outstanding at FYE13). Any new loan growth is likely to be funded by deposit growth, meaning the bank's loan/deposit ratio should remain about 100%. On-balance sheet liquid assets totalled NZD194m, or 13% of total assets, at FYE13, which is lower than some peers, although it easily covers the drawn component of the warehouse facility and a substantial portion of the bank's deposit base. The undrawn component of the warehouse facility (NZD98m at FYE13) also provides contingent liquidity, although Fitch places less emphasis on this in its analysis. Co-op accounts for less than 1% of the New Zealand banking market. However, it has a nationwide distribution network of 34 branches, distinguishing it somewhat from other domestic mutual peers. RATING SENSITIVITIES - IDRs AND VR A material deterioration in Co-op's operating environment, placing pressure on asset quality, and potentially eroding the bank's capital base would place downward pressure on the bank's IDRs and VR. Negative rating action may also result should the bank weaken its risk appetite and were its FCC ratio significantly decline as part of its growth strategy. Positive rating momentum is less likely in the short-term as it would require a sustainable and significant improvement in profitability while maintaining the bank's solid capitalisation, sound funding and liquidity positions, and modest risk appetite. KEY RATING DRIVERS AND SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR Co-op's Support Rating and Support Rating Floor reflect that support from the New Zealand sovereign is possible, although it cannot be relied upon. In Fitch's view, the introduction of the Open Bank Resolution Scheme (OBR) from 1 July 2013 reduces the propensity of the sovereign to support its banks. The OBR allows for the imposition of losses on depositors and senior debt holders to make up capital shortfalls if a deposit-taking institution has failed. The rating actions are as follows: Co-operative Bank: Long-Term IDR: assigned at 'BBB-'; Outlook Stable; Short-Term IDR: assigned at 'F3'; Viability Rating: assigned at 'bbb-'; Support Rating: assigned at '5'; and Support Rating Floor: assigned at 'NF'. Contact: Primary Analyst John Birch Director +61 2 8256 0345 Fitch Australia Pty. Ltd., Level 15, 77 King Street, Sydney NSW 2000 Secondary Analyst Tim Roche Senior Director +61 2 8256 0310 Committee Chairperson Mark Young Managing Director +65 6796 7229 Applicable criteria, "Global Financial Institutions Rating Criteria", dated 15 August 2012, is available at Media Relations: Iselle Gonzalez, Sydney, Tel: +61 2 8256 0326, Email: Additional information is available on Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S FREE WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Fitch Australia Pty Ltd holds an Australian financial services licence (AFS licence no. 337123) which authorises it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.

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