July 25, 2012 / 1:41 AM / in 5 years

TEXT-S&P Affirms Bendigo and Adelaide Bank 'A-/A-2' Rtg; Otlk Stable

(The following was released by the rating agency)


-- Following a review of Bendigo and Adelaide Bank Ltd. (BEN), we have affirmed our counterparty credit ratings on BEN at ‘A-/A-2’. The outlook remains stable.

-- Our ratings on BEN reflect the bank’s adequate business position, strong capital and earnings, adequate risk position, below-average funding, and adequate liquidity levels.

-- The stable outlook reflects our opinion that BEN will maintain its risk-adjusted capital ratio at more than 10% over the medium term, while maintaining its current business stability and franchise strength.

-- At the same time, we have affirmed the ‘A-/A-2’ ratings on BEN’s subsidiary Rural Bank Ltd.

Rating Action

On July 25, 2012, Standard & Poor’s Ratings Services affirmed its counterparty credit ratings on BEN at ‘A-/A-2’. At the same time, we have affirmed the issue rating on BEN’s two hybrid capital instruments--Adelaide Bank step-up preference shares and Bendigo preference shares--at ‘BBB-', which is three notches below the bank’s stand-alone credit profile. The outlook on the ratings is stable. We have also affirmed the ‘A-/A-2’ ratings on Rural Bank Ltd., which are equalized with those on its ultimate parent, BEN, because we consider Rural Bank to be a “core” subsidiary of BEN under Standard & Poor’s criteria for rating group entities.


Our ratings on Bendigo and Adelaide Bank Ltd. (BEN) reflect the anchor stand-alone credit profile (SACP) for a bank operating only in Australia; plus BEN’s “adequate” business position, “strong” capital and earnings, “adequate” risk position, “below-average” funding, and “adequate” liquidity levels. Our bank criteria use the Bank Industry Country Risk Assessment (BICRA) economic risk and industry risk scores to determine a bank’s SACP, the starting point in assigning an ICR. The anchor SACP for a bank operating only in Australia is ‘a-'. The BICRA score is informed by our evaluation of economic risk, where we view Australia as a wealthy, open, and resilient economy. We consider that build-up of private sector credit and asset prices has eased in recent years, and that moderate private sector debt is offset by conservative lending practices and a creditor-supportive legal framework. With regard to industry risk, our assessment of the Australian banking industry is underpinned by the country’s conservative and comprehensive regulation, and the banking sector’s very low risk appetite, partly offset by limited funding support from customer deposits and a material dependence on net external borrowings.

The SACP for BEN is ‘a-'.

We assess BEN’s business position as “adequate”, reflecting our favorable view of the bank’s business franchise and stability. The bank’s stability has benefited from BEN becoming more nationally focused, and from BEN’s unique Community Bank network that sees it partnering with communities to ensure its local presence, particularly throughout regional parts of Australia. This strategy has helped embed widespread customer support for the bank. Although the dominant major banks maintain a stronger business position in the Australian banking system, BEN’s business franchise and sound net interest margin of 1.80% at Dec. 31, 2011, provide it with good capacity to compete. BEN’s business focus continues to be weighted to residential mortgage lending (which represented about 65% of total lending exposures at Dec. 31, 2011). Nevertheless, it has meaningful business diversity, with activities in consumer and small-medium enterprise (SME) banking, wealth management, and agri-business banking. Furthermore, the bank is well diversified geographically, with a good market position in its home regions of Victoria and South Australia, and relatively better market positions outside its home region compared to its peers. Our assessment of BEN’s business position also incorporates our favorable view of the bank’s stable management team, which has demonstrated a good track record of implementing its business strategy--in our view supporting the stability of future returns.

BEN’s capital and earnings profile is assessed as “strong”, underpinned by our expectation that the bank will maintain its risk-adjusted capital (RAC) ratio at more than 10% in the medium term. The recent strengthening in its RAC ratio to more than 10% has been supported by its December 2011 A$150 million institutional share placement and February 2012 Share Purchase Plan, which raised an additional A$46 million in capital. Factored into our expectations of a projected RAC ratio between 9.9% and 10.4% is our understanding that the bank will continue to undertake a range of capital-management initiatives to sustain its RAC ratio at a level supportive of its strong capital and earnings assessment. Additionally, we expect BEN to redeem or convert outstanding reset preference shares at the next reset date--Nov. 1, 2012--which could also positively affect its level of total adjusted capital. The strong assessment is further supported by the improvements in the quality of BEN’s capital from the aforementioned capital initiatives. Although core earnings are lower than those of the major banks, BEN’s ratio of core earnings to adjusted assets of 0.65% at Dec. 31, 2011, was stronger than its regional bank peers’ and supportive of its capital generation.

We assess BEN’s risk position as “adequate”. In the 12 months to March 31, 2012, BEN recorded growth that was above the average in the Australian banking system in residential lending (9%) and deposits (11%). Despite the growth, we believe the bank has maintained its conservative underwriting standards, which has supported its ability to maintain relatively low loss levels. We view BEN’s February 2012 acquisition of the Bank of Cyprus Australia Ltd. (BOCA) operations for A$130 million as consistent with BEN’s strategy of community banking, with BOCA’s focus on Hellenic communities across Australia. BEN’s loss experience remains low, with annualized net charge-offs of A$30.8 million in the six months to Dec. 31, 2011, compared with the normalized credit losses used in capital, and earnings of A$200 million. At Dec. 31, 2011, about 15% of BEN’s funding came from the securitization market.

Funding is assessed as “below average” and liquidity as “adequate”. BEN relies predominantly on retail deposits for funding, which represented 77% of total funding at Dec. 31, 2011. The below average assessment for funding reflects our opinion of the strength and stability of BEN’s funding mix relative to the domestic industry average, which is dominated by the major Australian banks. This assessment importantly factors in BEN’s ability to meet its obligations under adverse circumstances and absent any system-wide support relative to other financial institutions. Although BEN has demonstrated a sound capability in attracting and retaining customer deposits in the past, particularly within its Community Branch network, the bank’s funding profile (along with other smaller financial institutions) could come under pressure if the larger banks competed more significantly or if there was a flight to quality under a more stressed scenario. At March 31, 2012, BEN’s high-quality liquid-asset ratio was 11.0% (11.3% at Sept. 30, 2011), which, together with other sources of liquidity, provides adequate cover against BEN’s borrowings.

Based on BEN’s small size--with assets of A$56 billion at Dec. 31, 2011, representing about 2% of system assets--we currently rate BEN the same as its SACP, reflecting our assumption of the low likelihood of extraordinary government support in the event such a need arose. In our view, the absence of extraordinary government support for BEN would not necessarily lead to wider system-wide financial stress.


The stable outlook reflects our expectation that BEN will: maintain its RAC ratio at more than 10% over the medium term; maintain its sound loss experience; and continue to improve revenue stability, which has added further support to its “adequate” business position assessment.

The most likely scenario for a downgrade would relate to a reassessment of BEN’s capital and earnings assessment to “adequate” from the current assessment of “strong”, particularly as the bank’s projected RAC ratio is marginal for the current assessment. This scenario could come about if BEN decided not to progress capital-management initiatives required to maintain its RAC ratio at more than 10%, due to a change in its capital-management strategy or due to the realization of a large unexpected loss or downturn in earnings, particularly if this was accompanied by above-system loan growth.

Although a less likely scenario, the ratings could also come under downward pressure if BEN were unable to maintain its business stability under a more difficult operating environment, resulting in its business position assessment being revised to “moderate” from “adequate”.

Upward rating prospects are limited in the short-to-medium term. The most likely scenario for an upgrade would stem from a strategic shift in the bank’s capital-management plans that resulted in a sustained elevation in its RAC ratio to a level commensurate with an assessment of “very strong”.

Ratings Score Snapshot

Issuer Credit Rating A-/Stable/A-2


Anchor a-

Business Position Adequate (0)

Capital and Earnings Strong (+1)

Risk Position Adequate (0)

Funding and Liquidity Below Average

and Adequate (-1)

Support 0

GRE Support 0

Group Support 0

Sovereign Support 0

Additional Factors 0

Related Criteria And Research

-- Banks: Rating Methodology And Assumptions, Nov. 9, 2011

-- Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011

-- Group Rating Methodology And Assumptions, Nov. 9, 2011

-- Bank Hybrid Capital Methodology And Assumptions, Nov. 1, 2011

Ratings List

Ratings Affirmed

Bendigo and Adelaide Bank Ltd.

Rural Bank Ltd.

Counterparty Credit Rating A-/Stable/A-2

Bendigo and Adelaide Bank Ltd.

Certificate Of Deposit

Foreign Currency A-

Local Currency A-/NR

Rural Bank Ltd.

Certificate Of Deposit

Local Currency A-2

Bendigo and Adelaide Bank Ltd.

Senior Unsecured A-

Subordinated BBB+

Preference Stock BBB-

Commercial Paper A-2

Rural Bank Ltd.

Subordinated BBB+

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