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April 14 (The following statement was released by the rating agency)
Fitch Ratings has assigned a Long-Term Issuer Default Rating (IDR) of 'BBB+' to Police Bank Ltd (Police Bank). The Outlook 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)
Police Bank's IDRs, VR and Stable Outlook reflect its funding and liquidity strengths, good capital ratios and excellent asset quality. Constraining factors for the ratings include the bank's small absolute size, limited franchise, and geographical concentration.
Police Bank's loans are fully funded by household deposits, and capital ratios are good, although absolute capital levels are small. Wholesale funding, which accounted for 3% of total funding (excluding derivatives) at 30 June 2013 (FYE13), and which consisted of certificates of deposit, may grow modestly through FY14 and FY15, although Fitch expects the loan to deposit ratio to remain below 100% (FY13: 91%). As Police Bank is a mutual organisation, access to new capital is limited to retained earnings which are considered adequate in view of projected balance sheet growth.
The bank's franchise is built around its traditional customer base, the New South Wales police force. However, on a broader scale it accounts for less than 1% of Australian banking system assets. Geographic concentration in New South Wales is also a risk, with around 39% of the loan book being exposed to Sydney and its western suburbs at FYE13.
Police Bank's asset quality is strong, with low levels of impaired loans over the past four years. This reflects the bank's conservative risk appetite which, together with high levels of collateralisation and a focus on lower risk lending categories, supports its strong asset quality relative to most peers. The bank's customer profile also contributes, with the job security of police force members being less reliant on economic cycles compared to many other industries.
RATING SENSITIVITIES - IDRs AND VR
Police Bank's IDRs and VR are sensitive to a change in the bank's company profile, capitalisation, and funding and liquidity. A material deterioration in capital, funding and/or liquidity may lead to negative rating action. Positive rating momentum would require a significantly stronger franchise while maintaining its other credit strengths, though this is considered unlikely in the short- to medium-term.
KEY RATING DRIVERS AND RATING SENSITVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR
Police Bank's Support Rating of '5' and Support Rating Floor of 'No Floor' reflect Fitch's view that while support from the authorities is possible, it cannot be relied upon. Support Ratings and Support Rating Floors are sensitive to any change in assumptions around the propensity or ability of the Australian sovereign to provide timely support to the bank.
The rating actions are as follows:
Police Bank Ltd:
Long-Term IDR assigned at 'BBB+'; Outlook Stable;
Short-Term IDR assigned at 'F2';
Viability Rating assigned at 'bbb+';
Support Rating assigned at '5'; and
Support Rating Floor assigned at 'No Floor'.