August 15, 2014 / 1:31 AM / in 3 years

Fitch Affirms Nelson Building Society at 'BB+'

(The following statement was released by the rating agency) SYDNEY, August 14 (Fitch) Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) of Nelson Building Society (NBS) at 'BB+'. The Outlook is Stable. A full list of rating actions can be found at the end of this commentary. KEY RATING DRIVERS - IDR AND Viability Rating (VR) The affirmation of NBS's IDR, VR and Stable Outlook reflect the society's consistently strong operating performance, solid asset quality, stable funding and liquidity profiles and adequate capital ratios. The main constraint on the ratings is the society's moderate franchise which can limit pricing power and competitive advantages, and NBS's small absolute size which increases concentration risks. Intense lending competition has constrained loan growth and profitability for some smaller FI's in New Zealand. However, NBS performance in the face of this pressure has been very strong. Operating profits increased 43% to NZD3.1m as the society continues to benefit from good loan growth (up 10% in financial year ended 31 March 2014 'FYE14) and wider net interest margins of 2.51% in FY14 (FY13: 2.43%). The majority of NBS's growth has originated from the more recently established Takaka and Ashburton branches. A solid regional presence, strong community links, and established and experienced branch managers have enabled NBS to compete on its service proposition and help offset pricing pressure in the market. However, as a mutual institution, NBS has limited capital raising options and rapid loan growth has pressured capital ratios. Capital ratios are maintained with moderate buffers over regulatory minimums and using a non-risk adjusted measure of tangible common equity/tangible assets are lower than domestic peers. However, measured against more highly rated international peers, NBS capital ratios were stronger. Solid earnings enabled this ratio to increase to 6.16% at FYE14 (FYE13: 5.82%). Despite rapid loan growth the society has maintained a conservative underwriting approach, reflected in its historically solid asset quality. At FYE14, NBS had two impaired loans which equated to a loan-impairment/gross loan ratio of 0.45% (FYE13: 0%), and well secured past due loans had declined by 62% to NZD0.4m. RATING SENSITIVITIES - IDR AND VR An upgrade to NBS's IDR and VR would require the society to improve the value of its franchise, decrease its concentrations and strengthen its capital position. This would most likely be the result of the successful execution of its growth strategy, on-going improvements in operating profitability and cost control, and no deterioration in asset quality. A negative rating action could occur if asset quality unexpectedly deteriorated due to its large single-name or geographic concentrations, or because of poorly managed expansion and loan growth. Weaker capitalisation and damage to NBS's reputation and franchise could have a knock on effect on deposits and threaten the society's access to funding, possibly resulting in a rating downgrade. KEY RATING DRIVERS & RATING SENSITVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR The 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 take into account the existence of a legal framework - the Open Bank Resolution Scheme (OBR), which reflects a reduced propensity of the New Zealand government to support to financial institutions. The Support Rating and Support Rating Floor are sensitive to any change in assumptions around the propensity or ability of the New Zealand government to provide timely support to the bank. The rating actions are as follows: Nelson Building Society (NBS): Long-Term IDR affirmed at 'BB+'; Outlook Stable; Short-Term IDR affirmed at 'B'; Local Currency Long-Term IDR affirmed at 'BB+'; Outlook Stable; Local Currency Short-Term IDR affirmed at 'B'; Viability Rating affirmed at 'bb+'; Support Rating affirmed at '5'; and Support Rating Floor affirmed at 'NF'. Contact: Primary Analyst John Birch Director +61 2 8256 0345 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 at 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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