October 31, 2017 / 7:21 AM / a year ago

Fitch Affirms Ratings of Six Australian Regional Banks

(The following statement was released by the rating agency) SYDNEY, October 31 (Fitch) Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) of six Australia-based regional banks as follows: - Suncorp-Metway Limited (SML) at 'A+', Outlook Stable - ING Bank (Australia) Limited (INGBA) at 'A', Outlook Stable - Bendigo and Adelaide Bank Limited (BEN) at 'A-', Outlook Stable - Bank of Queensland Limited (BOQ) at 'A-', Outlook Stable - Heritage Bank Limited (HBL) at 'BBB+', Outlook Stable - Police Bank Ltd (PBL) at 'BBB+', Outlook Stable Fitch has also affirmed all other ratings of these banks. SML's Support Rating Floor has been withdrawn at the same time as it is no longer considered relevant to Fitch's coverage. A full list of rating actions is at the end of this rating action commentary. Risk appetite remains the key rating driver for the Viability Ratings of each of these six banks as it is a key determinant of profitability and capitalisation through a cycle. It is also normally a key input for asset quality, although regulatory intervention means differentiation between the asset quality of these banks is unlikely over the rating horizon. We do not expect risk appetites to be materially weakened in the current environment, especially given the regulatory focus on mortgage underwriting. This is particularly important as risks continue to build in Australia's household sector. High and rising household debt combined with low wage growth and still elevated levels of underemployment make Australia's households increasingly susceptible to a sharp rise in either unemployment or interest rates. However, neither of these scenarios is part of Fitch's base case for the system. All six banks have more than half of their assets in residential mortgages, with HBL having the highest proportion at about 80%. We consider these banks to be price-takers due to their relatively modest national franchises. SML's franchise benefits from being part of the Suncorp group, which also operates one of the largest non-life insurers in Australia. Franchises tend to be stronger within the banks' regional home markets and some entities benefit from community or member support. This ultimately leads to a level of geographic concentration for all but INGBA, which has a more diversified portfolio. KEY RATING DRIVERS IDRS, VIABILITY RATINGS AND SENIOR DEBT Suncorp-Metway Limited SML's Long-Term IDR and senior debt ratings are aligned with that of its ultimate parent, Suncorp Group Limited (SGL; A+/Stable), reflecting an extremely high probability of support, if required. SGL's ability to provide support to the bank, most likely through its insurance entities, is strong. Moreover, all entities operate under the same regulator, indicating that capital fungibility would be high. SML's Viability Rating is underpinned by its strengthened risk framework, meaning it is well placed to withstand a downturn should it occur. The investment made into the risk framework supports SML's sound asset quality, profitability and capitalisation and means the bank is likely to be among the first of its regional bank peers to seek advanced accreditation. SML has a relatively high reliance on offshore wholesale funding, although liquidity management is sound. SML's franchise gains some benefit from its ownership by SGL. The bank's strategy is largely driven by the group, and is likely to result in greater integration between SGL's operating subsidiaries. This could boost SML's market share, as it has a much deeper customer base, although the boost is likely to take longer to achieve than Fitch's two- to three-year rating horizon and hence has limited positive implications for SML's Viability Rating at present. ING Bank (Australia) Limited INGBA's Long-Term IDR is rated one notch below that of its ultimate parent, ING Bank N.V. (ING, A+/Stable), and reflects an extremely high probability of institutional support from the parent should it be required. INGBA has an important role within the group in Fitch's opinion and the parent is well placed to provide support if needed - INGBA accounted for 4% of ING's total assets at 31 December 2016. It also reflects that the parent is based in another country and subject to a different regulator. INGBA's risk appetite is a key driver of its Viability Rating, especially given the bank's growth aspirations. The loan book is heavily weighted towards residential mortgages, although the bank is growing its wholesale banking exposures. INGBA's management quality and risk framework benefit from being part of the ING group and result in a conservative risk appetite. INGBA's capitalisation, as measured on both risk- and un-risk weighted ratios, should continue to support its Viability Rating through the next 12-18 months, even though Fitch expects the bank's capitalisation ratios to fall as a result of the bank's growth plans. Similarly, INGBA's asset-quality ratios are likely to move towards those of its peers due to its growth aspirations. However, INGBA has the ability to support its capital levels by means of the level of dividend payments it makes to the parent entity. Bendigo and Adelaide Bank Limited BEN's IDRs, Viability Rating and senior debt ratings reflect its adequate risk appetite, which supports its consistently low non-performing loan ratio. The ratings also consider BEN's moderate franchise in a highly concentrated and competitive market, as well as its weaker funding position relative to international peers. Competitive pressure on lending spreads, combined with slower organic asset growth, rising funding costs and potential increasing loan impairment charges, albeit from a low base, are likely to restrain profit growth in the financial year ending June 2018 (FY18). Fitch expects BEN's risk appetite to remain stable, benefiting from risk control improvements and tight underwriting standards in recent years. This should support the bank's loan-quality performance through the economic cycle. BEN is mainly exposed to residential mortgages. Asset growth is likely to continue to be driven by organic growth and opportunistic acquisitions of smaller lenders or loan portfolios, which Fitch expects to be within BEN's risk appetite settings. BEN's funding position benefits from a larger proportion of household deposits relative to many domestic peers, although the proportion lags those of many international retail banks. Wholesale funding adds diversity and the lengthened maturity profile supports the bank's liquidity management. Fitch expects BEN's capital to remain adequate, as we expect it to maintain solid profitability. Additionally, BEN would be able to increase its internal capital generation through its dividend re-investment plan or raise capital directly through the capital markets, an option its mutual peers do not have. Bank of Queensland Limited BOQ's improved underwriting standards, risk control framework, and financial profile leave it well positioned to withstand a downturn in the operating environment if it were to emerge. A modest franchise in a competitive environment and greater reliance on wholesale funding relative to most domestic peers somewhat offset these factors. BOQ has a competitive advantage in some niches, such as with medical professionals, which results in some pricing power in these segments, reflected in the returns generated. This is partially offset by a relatively large asset leasing exposure, which is likely to have weaker performance than BOQ's retail portfolios through a cycle. BOQ's capitalisation, including its regulatory capital targets, is adequate for its current rating. BOQ has reasonable capital flexibility - it is a listed entity so it can access fresh capital from the markets and manage its dividend reinvestment plan. Liquidity management is sound and alleviates some of the risks associated with BOQ's reliance on wholesale funding. Heritage Bank Limited HBL's heavy weighting towards mortgages - these made up 96% of total loans at 30 June 2017 - has resulted in consistently strong loan quality ratios. However, profitability metrics lag some peers and are reflective of the bank's mutual ownership structure, which results in a greater focus on customer service. Capitalisation is adequate for HBL's size and nature of operations. The bank's risk-weighted ratios are towards the upper-end of Fitch-rated Australian banks, but this appears warranted as HBL's small absolute size and mutuality limit financial flexibility and ability to access new common equity. Police Bank Limited PBL's IDRs and Viability Rating reflect its conservative risk appetite, strong asset quality, robust capitalisation and wholly deposit funded loan book. PBL's modest franchise is aimed at servicing core members. The bank operates a simple business model, mainly focused on retail lending, and benefits from a loyal membership base. The management change that occurred in 2016 is unlikely to significantly alter the bank's core strategy in the short term, although it may increase its focus on improving its digital offerings and cost efficiency to make it more competitive. The bank's asset quality is one of the strongest within its peer group and is supported by PBL's conservative underwriting criteria, which is focused mainly on owner-occupier mortgages. PBL has a higher proportion of personal lending than its peers, although this risk is partially mitigated by the profile of its core borrowers - mostly public-service employees that Fitch sees as having higher employment security compared with other industries. The focus on this niche market does however, create concentration risk for the bank in terms of geographic and sector exposure. PBL has the highest capitalisation ratios within its domestic peer group, however Fitch views its absolute capital base as small and access to new capital is limited as a result of the mutual ownership structure. SUPPORT RATING AND SUPPORT RATING FLOOR Suncorp-Metway Limited, ING Bank (Australia) Limited SML and INGBA's Support Ratings of '1' reflect the extremely high likelihood of support from their respective parents should it be required. SML's Support Rating Floor of 'BB+' was withdrawn as it is no longer considered relevant to the agency's coverage. SML's ratings are driven by institutional support and Support Rating Floors are usually only assigned to banks with a sovereign-driven Support Rating. It reflected a moderate potential for government support. SML's Support Rating Floor was one notch higher than BEN's and BOQ's to reflect that it is part of a larger financial group that plays a key role in the Australian market. Bendigo and Adelaide Bank Limited, Bank of Queensland Limited BEN and BOQ's Support Rating of '3' and Support Rating Floor of 'BB' reflect the moderate potential of government support should it be needed, given their modest market shares and role in the banking system. Heritage Bank Limited, Police Bank Limited HBL and PBL'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 due to the banks' small market share and low systemic importance. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The ratings of the subordinated debt issued by BEN, BOQ and HBL are notched one level down from the anchor Viability Ratings for loss severity. No notching has been applied for non-performance risk. RATING SENSITIVITIES IDRS AND SENIOR DEBT SML and INGBA's IDRs are sensitive to changes in the ability or propensity of their respective parents to provide support. The IDRs and senior debt ratings of BEN, BOQ, HBL and PBL are sensitive to factors that would affect their respective Viability Ratings. VIABILITY RATING The Viability Ratings of all six banks included in this review remain sensitive to any weakening in their respective risk appetites. This is most likely to be evidenced through more aggressive underwriting standards or looser risk controls while seeking asset growth, possibly in an effort to increase the bank's company profile. This may in turn manifest in a larger-than-peer deterioration in asset quality, profitability and capitalisation should there be a significant downturn in the operating environment. Strong asset growth may also challenge funding profiles, which may also pressure ratings if not offset through adequate capital and liquidity management. Positive rating action is unlikely given the modest franchises of these banks, as well as funding profiles that are weaker than many similarly rated international peers. SUPPORT RATING AND SUPPORT RATING FLOOR SML and INGBA's Support Ratings are sensitive to changes in Fitch's assumptions about the ability and propensity of their respective parents to provide timely support, if needed. This may result from a change in the parent's ratings (IDR for SML and Viability Rating for INGBA) or a weakening of the importance of SML or INGBA to their respective group's strategy. The Support Ratings and Support Rating Floors of BEN, BOQ, HBL and PBL are sensitive to changes in Fitch's assumptions about the propensity or ability of the Australian sovereign (AAA/Stable) to provide timely support. No change to the propensity of the authorities to provide support appears imminent, despite global moves, although we expect Australia's resolution framework to be strengthened in the medium term. This would remove any assumption of sovereign support. Negative action on the Support Ratings and Support Rating Floors of the Australian regional banks will not directly affect their IDRs, which are currently driven by their Viability Ratings (BEN, BOQ, HBL and PBL) or institutional support (SML and INGBA). SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The subordinated debt ratings of BEN, BOQ, and HBL are broadly sensitive to the same considerations that might affect their relevant anchor ratings, the Viability Rating. The rating actions are as follows: Suncorp-Metway Limited: Long-Term IDR affirmed at 'A+'; Outlook Stable Short-Term IDR affirmed at 'F1' Viability Rating affirmed at 'a-' Support Rating affirmed at '1' Support Rating Floor affirmed at 'BB+' and withdrawn Senior unsecured debt affirmed at 'A+'/'F1' Commercial paper affirmed at 'F1' ING Bank (Australia) Limited: Long-Term Issuer Default Rating affirmed at 'A'; Outlook Stable Short-Term Issuer Default Rating affirmed at 'F1' Support Rating affirmed at '1' Viability Rating affirmed at 'a-' Bendigo and Adelaide Bank Limited: Long-Term IDR affirmed at 'A-'; Outlook Stable Short-Term IDR affirmed at 'F2' Viability Rating affirmed at 'a-' Support Rating affirmed at '3' Support Rating Floor affirmed at 'BB' Senior unsecured debt affirmed at 'A-'/'F2' Commercial paper affirmed at 'F2' Subordinated debt affirmed at 'BBB+'. Bank of Queensland Limited (BOQ): Long-Term IDR affirmed at 'A-'; Outlook Stable Short-Term IDR affirmed at 'F2' Viability Rating affirmed at 'a-' Support Rating affirmed at '3' Support Rating Floor affirmed at 'BB' Senior unsecured debt affirmed at 'A-' Subordinated debt affirmed at 'BBB+' Heritage Bank Limited (HBL): Long-Term IDR affirmed at 'BBB+'; Outlook Stable Short-Term IDR affirmed at 'F2' Viability Rating affirmed at 'bbb+' Support Rating affirmed at '5' Support Rating Floor affirmed at 'No Floor' Senior unsecured debt affirmed at 'BBB+'/F2' Subordinated debt affirmed at 'BBB' Police Bank Limited (PBL): Long-Term IDR affirmed at 'BBB+'; Outlook Stable Short-Term IDR affirmed at 'F2' Viability Rating affirmed at 'bbb+' Support Rating affirmed at '5' Support Rating Floor affirmed at 'No Floor' Senior unsecured debt affirmed at 'BBB+'/'F2' Contact: Primary Analysts Tim Roche (SML) Senior Director +61 2 8256 0310 Fitch Australia Pty Ltd Level 15, 77 King Street, Sydney NSW 2000 Bert Jansen (INGBA, BOQ, PBL) Director +61 2 8256 0345 Jack Do (BEN, HBL) Director +61 2 8256 0355 Secondary Analysts Tim Roche (BOQ, HBL) Senior Director +61 2 8256 0310 Bert Jansen (BEN) Director +61 2 8256 0345 Jack Do (INGBA, SML, PBL) Director +61 2 8256 0355 Committee Chairperson Jonathan Lee Senior Director + 886 2 8175 7601 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. 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