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Fitch Rates New Zealand's TSB Bank 'A-'/STABLE
July 1, 2014 / 1:31 AM / 3 years ago

Fitch Rates New Zealand's TSB Bank 'A-'/STABLE

(The following statement was released by the rating agency) SYDNEY, June 30 (Fitch) Fitch Ratings has assigned a Long-Term Issuer Default Rating (IDR) of 'A-' to TSB Bank Limited (TSB). 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) TSB's IDRs, VR and Stable Outlook reflect its conservative risk appetite which has resulted in consistently sound asset quality above industry average for the past decade. At the same time, TSB's simple business model has resulted in a strong balance sheet structure and sustainable operating performance. TSB's liquidity, funding and capital positions are good for an institution of its size. However, the ratings also take into account TSB's small domestic franchise, geographic concentration and lack of ability to raise capital. TSB's risk appetite has been conservative, reflected in cautious loan book expansion outside its home region and into new customer segments such as commercial property and rural lending. Underwriting standards appear tight despite the bank's above-system growth, and non-household exposures have remained small. There is some geographic concentration in the loan portfolio - around one-third was exposed to Taranaki at financial year-end, 31 March 2014 (FYE14) - but it is well diversified by single name exposures. However, Taranaki is a fairly wealthy region with a below-national unemployment rate, which should continue to support asset quality. TSB's policy requires it to maintain a liquid balance sheet. TSB holds a significantly larger liquidity portfolio relative to its domestic peers. Around 44% of total assets accounted for securities held until maturity in the bank's liquidity portfolio. Credit risk is well managed as a result of strict underwriting standards as most of these securities are repo-eligible with the Reserve Bank of New Zealand. The recent debt restructure of Solid Energy - a state-owned corporation which was unsupported - has resulted in an impairment charge and a change in the bank's approach to its investments into state-owned entities. However, single name and industry concentrations are likely to continue - although these are mostly linked to the large New Zealand-based banks. Since early 2000, TSB has consistently achieved solid operating profitability, considering the bank's community-trust ownership and strong capital ratios. Healthy balance sheet growth and good margin management have supported revenue generation. In addition, TSB has strong cost management relative to its peers. It owns a smaller branch network but operates a centralised customer-service centre which proportionally generates a large part of the new business. TSB's capitalisation is adequate for its risks. In FY14, its capital ratios reduced by 65 basis points, reflecting the purchase of a stake in FisherFunds. Future revenue generation through this investment is expected to offset the recent decline in TSB's regulatory capital ratios. However, TSB's ownership status limits the bank's access to fresh capital if needed. TSB's funding and liquidity position is strong relative to its peers, and the agency does not expect this to change in the medium-term. Its entire loan book has always been funded by customer deposits. About 50% of these deposits have been sourced in its home market. A modest increase in wholesale funding may be viewed positively as it could contribute to diversification, especially if TSB maintains a liquid balance sheet. RATING SENSITIVITIES - IDRs AND VR TSB's IDRs and VR are sensitive to a change in the bank's risk appetite. An increased risk profile, reflected in weaker underwriting standards and/ or risk controls, or a substantial increase in asset growth could lead to deterioration in asset quality, operating performance and capitalisation which could result in negative rating actions. Positive rating momentum would require significant improvements in the bank's franchise while maintaining its current business model and risk appetite which is unlikely in the short- to medium-term. KEY RATING DRIVERS AND RATING SENSITVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR TSB'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. The Support Rating and Support Rating Floor also take into account the existence of a legal framework, the Open Bank Resolution Scheme (OBR), which reflects a reduced propensity of the New Zealand sovereign to support its banks. The OBR allows for the imposition of losses on holders of senior debt to make up capital shortfalls if a deposit-taking institution has failed. Support Ratings are sensitive to any change in assumptions around the propensity or ability of the New Zealand sovereign to provide timely support to the bank. The rating actions are as follows: TSB Bank Limited Long-Term IDR assigned at 'A-'; Outlook Stable Short-Term IDR assigned at 'F2' Viability Rating assigned at 'a-' Support Rating assigned at '5' Support Rating Floor assigned at 'No Floor' 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 Senior Director +61 2 8256 0310 Committee Chairperson Mark Young Managing Director +65 6796 7229 Media Relations: Leni Vu, Sydney, Tel: +61 2 8256 0326, Email: Additional information is available on Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 31 January 2014 is available at 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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