Fitch Assigns New Zealand Association of Credit Unions 'BB+'/Stable

Mon Feb 17, 2014 12:08am EST

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(The following statement was released by the rating agency) SYDNEY, February 17 (Fitch) Fitch Ratings has assigned New Zealand Association of Credit Unions (NZACU) Long- and Short-Term Issuer Default Ratings (IDR) of 'BB+' and 'B' 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 NZACU's ratings reflect its concentrated customer base and limited franchise outside of the credit union and building society sector, which accounts for less than 1% of New Zealand's financial system. The members of NZACU, including the credit union and building society sector as a whole, are unlikely to reach investment grade due to geographic concentration and a limited loss absorption capacity in the form of small absolute levels of profit and capital. However, modest levels of credit and market risk partially offset these factors. NZACU is a service provider (mainly to its member credit unions and building societies) and trade organisation, with no direct exposure outside its wholly-owned insurance subsidiary to its members' end customers. It has a small run-off loan portfolio which it aims to substantially reduce during the financial year ending 30 June 2014, and some counterparty risk in its 'central banking' operations, which provide centralised liquidity management for members, giving them access to investments and returns that they may not be able to obtain on a standalone basis. Investments in the 'central banking' operations are generally of good quality. The majority (FYE: 94%) are investment grade, with the remainder being unrated local council exposures. The two largest depositors accounted for 60% of the total at FYE13. This concentration in member deposits provides some liquidity risk, although the underlying credit unions appear to have reasonable levels of liquidity outside their NZACU holdings. The 'central banking' operations are the dominant component of NZACU's balance sheet, accounting for all non-equity balance sheet funding, and 94% of total assets at FYE13. Profitability was reasonable in FY13, with operating profit/average total assets being 1.23%, but absolute levels are low and there is some volatility in earnings. This is in part due to changes in impairment provisions related to the legacy loan portfolio, but also includes discounts and other benefits provided by NZACU to full members. Profitability should improve if the association is able to expand its non-member customer base at arms-length prices. Capitalisation is modest for a non-bank, with tangible common equity/ tangible assets ratio being 8.75% at FYE13, and the absolute level is small. The association's dividend policy, which seeks to provide a set return for base capital noteholders that is unrelated to profitability, means capital accretion can be volatile. The NZACU is a trade organisation and service provider for a number of New Zealand credit unions and building societies. It had 18 members and five associate members at FYE13. It provides transactional, IT and liquidity services, offering economies of scale benefits for customers. It also owns Credit Union Insurance Limited (Insurer Financial Strength rating: BB+/Stable), which provides life and non-life products to NZACU's member customers. RATING SENSITIVITIES - IDRS NZACU's IDRs are sensitive to developments in New Zealand's credit union and building society sector. If conditions were to materially weaken, or larger members encounter difficulties, NZACU's ratings would face downward pressure. Loss of member confidence leading to members exiting the association would also place negative pressure on ratings. A significant diversification of NZACU's customer base, and a substantial increase in absolute capital and profitability levels, would be required for positive rating momentum. This is unlikely in the short- to medium-term. The ratings are as follows: New Zealand Association of Credit Unions: Long-Term IDR assigned at 'BB+'; Outlook Stable; and Short-Term IDR assigned at 'B'. Contacts: Primary Analyst Tim Roche Senior Director +61 2 8256 0310 Fitch Australia Pty. Ltd., Level 15, 77 King Street, Sydney NSW 2000 Secondary Analyst John Birch Director +61 2 8256 0345 Committee Chairperson Mark Young Managing Director +65 6796 7229 Applicable criteria, Global Financial Institutions Rating Criteria, dated 31 January 2014, are available at www.fitchratings.com. Media Relations: Iselle Gonzalez, Sydney, Tel: +61 2 8256 0326, Email: iselle.gonzalez@fitchratings.com. Additional information is available on www.fitchratings.com 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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