(The following was released by the rating agency)
SYDNEY, December 17 (Fitch) Fitch Ratings has affirmed
Australia-based Bank of Queensland's (BOQ) Long- and Short-Term
Issuer Default (IDR) ratings at 'BBB+' and 'F2' respectively.
The Outlook on the Long-Term IDR is Stable. At the same time,
the agency affirmed BOQ's Viability Rating (VR) at 'bbb+' and
Support Rating at '3'.
The ratings reflect BOQ's improved capitalisation,
continued reduction in wholesale funding and solid liquidity.
They also factor in its sharp asset quality deterioration which
impacted the bank's profitability in the financial year ended 31
August 2012 (FY12), and concentration risk by region and product
due to its small size and limited franchise.
BOQ's ratings could be downgraded if asset quality
continues to deteriorate sharply and erodes its solid
capitalisation. Its asset quality and profitability are also
more susceptible to deterioration than peers due to its larger
exposure to Queensland whose economy, excluding mining,
continues to perform weakly.
The bank's ratings could also come under pressure from a
weakening of its liquidity position or from a material increase
in its reliance on wholesale markets. BOQ's new management has
taken steps to strengthen the bank' balance sheet but positive
rating action will depend on the bank's ability to achieve
recurrent healthy profitability while improving asset quality
and maintaining solid capitalisation.
Asset quality remains a weakness. A review conducted by
newly appointed Chief Executive Officer in H112 uncovered asset
quality problems in BOQ's commercial property portfolio, leading
to weaker impaired loan ratio at 1.52% at FYE12 (FYE11: 1.39%).
In response, the bank increased its provisioning, changed
underwriting practices, and tightened underwriting criteria. A
portfolio of the four largest non-performing exposures totalling
AUD156m was sold in H212. However, weaker economic conditions in
its key markets, including increasing unemployment, impacted
BOQ's retail portfolio in H212.
BOQ's capitalisation was significantly boosted by a capital
issue of AUD450m following the H112 loss. As a result of the
additional capital and slower risk-weighted asset growth, BOQ's
regulatory Tier 1 capital ratio and Fitch Core Capital ratio
improved considerably to 9.47% and 10.33% respectively in FY12
from 8.37% and 8.39% in FY11.
A low credit growth environment, combined with fierce
competition for deposits and loans, is likely to place pressure
on BOQ's revenue generation in FY13. Therefore cost management
is likely to be the bank's focus. Impairment charges will most
probably decline, reflecting the one-off nature of the charges
in H112. In FY12 BOQ continued to reduce its reliance on
wholesale funding. Customer deposits increased 14%, improving
the bank's loan/deposit ratio to 139% (FY11: 153%).
Wholesale funding was reduced by 10% to represent a third
of BOQ's funding at FYE12. The funding profile is well
diversified by instrument and maturity. Liquidity is solid, with
liquid assets covering wholesale debt maturing within 12 months.
BOQ's Support Rating and Support Rating Floor reflect a moderate
potential for support from the government, in case of need, due
to the bank's modest market share in Australia.
The 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.