December 6, 2017 / 2:22 AM / 10 months ago

Fitch Revises Outlook on New Zealand Association of Credit Unions to Negative; Affirms 'BB+'

(The following statement was released by the rating agency) SYDNEY, December 05 (Fitch) Fitch Ratings has revised the Outlook on New Zealand Association of Credit Unions (trading as Co-op Money NZ) to Negative from Stable and affirmed its Long- and Short-Term Issuer Default Ratings (IDR) at 'BB+' and 'B', respectively. The Negative Outlook is predicated on the risk that the association's franchise, business generation and profitability may weaken amid a smaller active membership base and higher operating costs. The affirmation of the IDRs reflects Fitch's view that the entity is likely to maintain stable performance over the next few years. KEY RATING DRIVERS Co-op Money NZ's rating is driven by its modest franchise and small customer base, which has shrunk over the previous year due to the withdrawal of business from two members, one of which was the largest. The association also has a less diverse and more specialised business model than industry peers. Co-op Money NZ's ratings also capture the size and strength of its members. The combined market share of the association's members is low relative to the financial system. The association is primarily a trade organisation and service provider to its members. Its core offerings include sector support, central banking and payment-clearing services. The association also provides services to institutions outside of its member base at market pricing. This segment is likely to be the main source of Co-op Money NZ's growth, due to the gradually declining number of credit unions in New Zealand. Profitability in the financial year ending June 2017 (FY17) was affected by the withdrawal of the association's largest member and the subsequent court proceedings on whether the association is allowed to sell services to associated members or third parties. The case was completed in November 2017 and was found in Co-op Money NZ's favour, but it was a costly distraction and highlighted the sensitivities of the association and potential need to separate non-member activities. Fitch expects profitability to remain flat over the next few years, despite potential revenue growth from external business, due to high level of ongoing investment, legal and restructuring costs. The provision of central banking and investment services accounted for the majority of Co-op Money NZ's balance-sheet assets as at FYE17. The association's services are provided for members' benefit and are not operated for profit maximisation. The small number of members and customers means deposit concentration is high. Co-op Money NZ's liquid-asset holdings are concentrated, mainly to the country's major banks, although the short duration of the holdings and liquidity policies in place mitigate some of the concentration risk. Co-op Money NZ's capitalisation is adequate for its size and operations. The association does not hold any debt, but this is reflective of its business model as a member-owned service provider. Fitch believes the association's capital is more susceptible to shocks than industry peers due to its higher concentration risk, small absolute capital base and limited access to new capital. RATING SENSITIVITIES Co-op Money NZ's ratings could be downgraded if membership disunity continues and resulted in a decline in the association's relevance for a sustained period. Failure to meet strategic goals amid slower-than-anticipated growth of its non-member businesses could also lead to a downgrade. The Outlook would be revised to Stable if the association were able to demonstrate an ability to maintain its performance and restore momentum in its external business growth. The ratings are also sensitive to changes in New Zealand's non-bank financial institutions sector. CRITERIA VARIATION: Fitch rates Co-op Money NZ under its Global Non-Bank Financial Institutions Rating Criteria (NBFI criteria), reflecting its treasury operations and business-to-business transactional service offerings. Fitch has varied its NBFI criteria by: - applying elements of both investment managers and financial market infrastructure subsectors within the NBFI criteria, as Co-op Money NZ operates in both segments; and - performing a qualitative rather than quantitative assessment of the association's financial profile, as the core ratios in the NBFI criteria cannot be meaningfully calculated. This is because the issuer, which operates as a mutually owned support organisation, does not have any debt or measured client fund flow and does not charge investment fees like a traditional investment manager, which are required inputs into Fitch's core ratios. Contact: Primary Analyst Jack Do Director +61 2 8256 0355 Fitch Australia Pty Ltd Level 15, 77 King Street, Sydney NSW 2000 Secondary Analyst Tim Roche Senior Director +61 2 8256 0310 Committee Chairperson Sabine Bauer Senior Director +852 2263 9966 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: Additional information is available on Applicable Criteria Global Non-Bank Financial Institutions Rating Criteria (pub. 10 Mar 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy 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 PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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