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

Fitch Affirms SBS Bank at 'BBB'

(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 Southland Building Society (SBS Bank, known as SBS). The Outlook is Stable. A full list of rating actions can be found at the end of this commentary. KEY RATING DRIVERS - IDRS, Viability Rating (VR) AND SENIOR DEBT SBS's IDRs, VR, senior debt ratings, and Outlook reflect its improving asset quality and operating performance and solid capital ratios. Offsetting these attributes is the bank's modest domestic franchise and limited pricing-power, although strategic initiatives are targeting a larger national presence. SBS's asset quality has benefited from stronger economic conditions, the work out of problem loans and tighter underwriting standards over the last four years. At the financial year ended 31 March 2014 (FYE14) the bank's impaired-loan ratio had declined to 0.88% (FYE13: 1.06%) and good coverage was maintained with an impaired-loan-coverage ratio of 103% (FYE13: 102%). Total impaired loans of NZD20.2m at FYE14 have halved from a peak of NZD41.2m at FYE12. SBS's stronger earnings and profitability was a result of improved asset quality in FY14, despite higher expenses. The bank's operating return on average equity increased to 9.2% (FY13: 8.9%) and cost/income ratio increased to 65% (FY13: 59%) which are comparable to domestic and international peers. Expenses are expected to remain elevated through FY15 but should moderate into FY16 if the growth strategy proves successful. Capital ratios are maintained with solid buffers over regulatory minimums which Fitch considers appropriate given financial flexibility and capital options are constrained by the banks mutuality. The Fitch core capital ratio (FCC) was 13.35% at FYE14 (FYE13: 12.95%) and consistent with domestic and international peers. However, using a non-risk adjusted measure of tangible common equity to tangible assets, SBS was stronger than international peers. In the context of the New Zealand banking system SBS has a modest franchise. The bank is regionally concentrated in the lower South Island and is a price taker in its main operating segments. However, as a mutual the bank seeks to differentiate itself through the value proposition it offers its customers, which are its members. Moreover, SBS has strengthened its risk appetite and framework, and is building its technological abilities which should enable it to compete more strongly on a national basis. RATING SENSITIVITIES - IDRS, VR AND SENIOR DEBT SBS's IDRs and VR are sensitive to a change in Fitch's assumptions around New Zealand's operating economy, competitive market environment and potential impact on SBS's business model. An upgrade to the bank's IDRs, VR and senior debt rating would require the bank to improve the value of its franchise through the successful execution of its growth strategy, demonstrate asset quality towards the high end of its peer group and maintain strong balance sheet metrics. SBS's senior unsecured debt 'deposit notes' have priority over the bank's redeemable shares which are its main funding source. As a result, Fitch rates SBS's senior unsecured debt one notch above its IDR and VR. These securities are able to achieve a one notch uplift given above average recovery prospects due to their small relative proportion compared to the redeemable shares. Rating sensitivities are consistent with those affecting SBS's IDR and VR. Should the level of subordination decrease through an increased level of issuance, the rating could be equalised with the IDR. The IDRs, VR and senior unsecured debt ratings allow for some deterioration in the operating environment as well as SBS's balance sheet composition, but potential negative rating pressure could occur if asset quality deteriorated and resulted in a negative impact to earnings, capital ratios and the reputation of the organisation. KEY RATING DRIVERS & RATING SENSITIVITIES - 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 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: Southland Building Society (SBS Bank): Long-term IDR affirmed at 'BBB'; Outlook Stable; Short-term IDR affirmed at 'F2'; Local Currency Long-term IDR affirmed at 'BBB'; Outlook Stable; Local Currency Short-term IDR affirmed at 'F2'; Viability Rating affirmed at 'bbb'; Support Rating affirmed at '5'; Support Rating Floor affirmed at 'NF'; Commercial Paper affirmed at 'F2'; and Long-Term senior unsecured debt (deposit notes) affirmed at 'BBB+'. 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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