Fitch Upgrades BOQS to 'BBB+/ Positive' on BOQ Acquisition

Mon Aug 4, 2014 9:33pm EDT

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(The following statement was released by the rating agency) SYDNEY, August 04 (Fitch) Fitch Ratings has today upgraded BOQ Specialist Bank Limited's (BOQS; formerly Investec Bank (Australia) Limited) Long-Term Issuer Default Rating (IDR), Short-Term IDR, Viability Rating (VR) and Support Rating following its acquisition by Bank of Queensland (BOQ; BBB+/ Positive). All ratings have been removed from Rating Watch Positive and the Long-Term IDR, placed on Positive Outlook. The Viability Rating has been withdrawn simultaneously. BOQ's ratings are unaffected by the completion of the transaction. A full list of rating actions is at the end of this rating action commentary. These actions follow the completion of BOQ's acquisition of BOQS on 31 July 2014, specifically its professional finance and asset finance and leasing businesses. Importantly, certain corporate loans were transferred to other entities within the Investec group prior to completion. This, combined with the funding and distribution benefits BOQS will have as part of a larger financial institution, was a key driver of the upgrade in the VR. The VR is withdrawn as it is no longer considered analytically meaningful. KEY RATING DRIVERS AND SENSITIVITES - IDRS AND SUPPORT RATING BOQS's IDRs and Support Rating reflect that it is a core subsidiary of BOQ, as does the Positive Outlook on the Long-Term IDR. Any change in BOQ's IDRs would likely result in a similar change in BOQS's IDRs. BOQS's Support Rating is likely to be upgraded if BOQ's IDRs are upgraded; however, a three notch downgrade of BOQ's IDRs would be required before BOQS's Support Rating would be downgraded. BOQS's IDRs and Support Rating may also be downgraded if Fitch no longer considers it a core subsidiary of BOQ. KEY RATING DRIVERS - VR BOQS's VR reflects a strong level of ordinary support from BOQ, particularly around distribution and funding. The acquisition should improve BOQS's franchise and allow it to cross-sell products with other BOQ customers. It will also allow it to offer a fuller range of products to existing customers, and give them access to a retail distribution network. Funding costs for the business should also fall as post-acquisition BOQS will source funding centrally from BOQ's treasury. About half of BOQS's deposit portfolio is on rates that are materially above those offered by BOQ. This presents some re-pricing risk, although BOQS retains a substantial holding of liquid assets which provides some offset. Profitability should benefit from the improved funding and distribution, as well as better efficiency due to being part of a larger bank. Asset quality should also improve with the removal of BOQS's corporate loans - the businesses acquired by BOQ have reported consistently low arrears and loan impairment charges. BOQS will be run largely as a separate division of BOQ's business bank with a continued focus on providing banking services for specialist professional segments such as medical and dental, accountants and financial advisers. The asset finance and leasing business will merge with the existing BOQ Finance business. The acquired business will be subject to BOQ's risk management framework, which, combined with the funding plan and BOQ's intention to return BOQS's banking licence to the regulator, indicates a reasonable level of integration into BOQ. This in turn leads to BOQS's intrinsic creditworthiness, as captured by its VR, being indistinguishable from that of BOQ. Fitch has decided to withdraw BOQS's VR as a result. KEY RATING DRIVERS AND SENSITIVITIES - GOVERNMENT GUARANTEED DEBT BOQS's government-guaranteed debt carries the same rating as the Australian sovereign. Any change in the sovereign rating will be reflected in the ratings of the government-guaranteed debt. KEY RATING DRIVERS AND SENSITIVITES - SUBORDINATED DEBT BOQS's subordinated debt is rated one notch below its Long-Term IDR rather than its VR to reflect Fitch's expectation that BOQ has the propensity and ability to support these instruments if needed, as per Fitch's criteria "Assessing and Rating Bank Subordinated and Hybrid Securities", dated 31 January 2014. The subordinated debt ratings are broadly sensitive to the same considerations that might affect BOQS's Long-Term IDR. The rating actions are as follows: Investec Bank (Australia) Limited Long-Term IDR: upgraded to 'BBB+' from 'BBB-'; Rating Watch Positive removed; placed on Positive Outlook; Short-Term IDR: upgraded to 'F2' from 'F3'; Rating Watch Positive removed; Viability Rating: upgraded to 'bbb+' from 'bbb-'; Rating Watch Positive removed; rating withdrawn; Support Rating: upgraded to '2' from '3'; Rating Watch Positive removed; Government guaranteed floating-rate notes: affirmed at 'AAA'; and Subordinated debt: upgraded to 'BBB' from 'BB+'; Rating Watch Positive removed. Contact: Primary Analyst Andrea Jaehne Director +61 2 8256 0343 Fitch Australia Pty Ltd Level 15, 77 King St, Sydney NSW 2000 Secondary Analyst Tim Roche Senior Director +61 2 8256 310 Committee Chairperson Mark Young Managing Director +65 6796 7229 Media Relations: Leni Vu, Sydney, Tel: +61 2 8256 0326, Email: Leni.Vu@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, "Global Financial Institutions Rating Criteria", dated 31 January 2014, "Rating FI Subsidiaries and Holding Companies", dated 10 August 2012, and "Assessing and Rating Bank Subordinated and Hybrid Securities Criteria", dated 31 January 2014, are available at www.fitchratings.com. Related Research - Fitch Places IBAL on Rating Watch Positive, 15 April 2014 here - Fitch Affirms Bank of Queensland on Acquisition Announcement, 15 April 2014, here Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Rating FI Subsidiaries and Holding Companies here Assessing and Rating Bank Subordinated and Hybrid Securities 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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