Fitch Affirms Bank of Queensland on Acquisition Announcement

Tue Apr 15, 2014 9:22pm EDT

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(The following statement was released by the rating agency) SYDNEY, April 15 (Fitch) Fitch Ratings has affirmed Bank of Queensland's (BOQ) ratings following the bank's announcement on 11 April 2014 that it will acquire Investec Bank (Australia) Limited (IBAL, BBB-/RWP). The Outlook on BOQ's Long-Term IDR is Positive. A full list of rating actions can be found at the end of this commentary. BOQ is acquiring IBAL's professional finance, asset finance and leasing businesses as part of a AUD440m deal. The transaction is subject to regulatory approval and the finalisation of IBAL's restructuring, which includes the transfer of certain corporate loans to other entities within the Investec Group. The earliest expected completion date is 30 June 2014. KEY RATING DRIVERS - IDRS, VR AND SENIOR DEBT BOQ's IDRs, VR and senior debt rating reflect its adequate local franchise in a highly competitive banking market that is dominated by four major banks which hold about 80% market share. The ratings also reflect the bank's improved capitalisation and pre-impairment operating profitability, and strengthened funding and liquidity positions. The acquisition will, on a pro-forma basis, increase BOQ's total assets by about 10% at 28 February 2014 (end-1H14). BOQ will fund most of the acquisition cost through a fully underwritten capital placement of AUD400m, thereby limiting the impact on its regulatory capital ratios. The deal is also likely to improve BOQ's geographic and customer diversity thanks to IBAL's solid niche in the provision of professional finance, specifically to medical professionals who make up 85% of the book at end-March 2014, with the remainder being accounting professionals. Fitch considers these borrower profiles to be strong as they are less exposed to economic cycles than many other industries. In addition, the executive management team for IBAL's professional finance has a strong understanding of the life cycle of the industry so retaining this team would help maintain the strengths of this business. The acquired business has reported consistently low arrears and loan impairment charges. Asset yields on the acquired loan book are stronger than BOQ's existing portfolio, with additional revenue potential through the cross-sell of other products to the new customer base. There is a level of repricing risk within the deposit portfolio being acquired, with about half of the book being on term deposit rates materially above BOQ's current offering. However, this risk is offset by a substantial level of liquid assets totalling AUD1.6bn that are included in the acquisition. BOQ released strong 1H14 financial results at the same time as announcing the acquisition. The result benefited from reduced funding costs offsetting competition on the asset pricing, strong cost management, and a decline in loan impairment charges. Asset quality continued to improve as impaired loans declined, although arrears remained stable in 1H14. Capital remained sound and funding was stable. However, BOQ's reliance on wholesale funding is a weakness relative to some international peers. KEY RATING DRIVERS - IDRS, VR AND SENIOR DEBT BOQ's Long-Term IDR, VR and senior debt rating could be upgraded if management successfully continues to execute its strategy, leading to: strong, sustainable operating profitability; improved funding and liquidity; and better risk metrics, while maintaining solid capitalisation over the next 12 months. Better risk metrics and sound asset quality would need to be proven by the seasoning of BOQ's portfolio in new markets and products which were underwritten in the past two years. These improvements are likely to become more visible beyond FY14. Additional key drivers for an upgrade would be the successful integration of the IBAL business and a continuing reduction of BOQ's legacy portfolio while maintaining good asset quality in its core business. KEY RATING DRIVERS AND SENSITIVITIES - SUPPORT RATING BOQ's Support Rating and Support Rating Floor reflect the moderate potential of government support, should it be needed, given BOQ's modest Australian market share. BOQ's 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 should it be required. The rating actions are as follows: Bank of Queensland (BOQ): Long-Term IDR: affirmed at 'BBB+'; Outlook Positive; Short-Term IDR: affirmed at 'F2'; Viability Rating: affirmed at 'bbb+'; Support Rating: affirmed at '3'; Support Rating Floor: affirmed at 'BB'; and Senior unsecured debt: affirmed at 'BBB+'. Contacts: Primary Analyst Andrea Jaehne Director +61 2 8256 0343 Fitch Australia Pty. Ltd., Level 15, 77 King Street, Sydney NSW 2000 Secondary Analyst Tim Roche Director +61 2 8256 0310 Committee Chairperson Jonathan Lee Senior Director + 886 2 8175 7601 Applicable criteria, "Global Financial Institutions Rating Criteria", dated 31 January 2014; "Rating FI Subsidiaries and Holding Companies", dated 10 August 2012, 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 Rating FI Subsidiaries and Holding Companies 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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