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Fitch Publishes New Zealand's First Credit Union's 'BB' Rating
June 9, 2017 / 4:41 AM / 2 months ago

Fitch Publishes New Zealand's First Credit Union's 'BB' Rating

(The following statement was released by the rating agency) SYDNEY, June 09 (Fitch) Fitch Ratings has published New Zealand-based First Credit Union's Long-Term Issuer Default Rating (IDR) of 'BB' with a Stable Outlook and Viability Rating of 'bb'. A full list of rating action is at the end of this commentary. KEY RATING DRIVERS IDRS AND VIABILITY RATING First Credit Union's IDRs and Viability Rating reflect a higher risk appetite relative to most other deposit taking institutions in New Zealand; this is likely to increase asset quality volatility through a cycle. The credit union's risk appetite partly reflects its customer base, which represents a part of the economy that is less adequately serviced by the country's banks. The credit union's rating also reflect its modest profitability stemming from a high operating cost base that limits its capacity to absorb higher losses from weaker asset quality. Conversely, First Credit Union reports strong capital ratios relative to peers and high liquid asset holdings. First Credit Union's higher risk appetite is manifested via geographic concentration and its loan portfolio split; about half of all loans at end-June 2016 (FYE16) were consumer loans, with the remainder being residential mortgages. Residential mortgages with a loan/value ratio above 80% made up about a third of all mortgages, a high proportion compared with New Zealand's banks and building societies. This loan split contributed to weaker asset quality relative to several peers; impaired loans were 2.8% of gross loans at FYE16. First Credit Union has low profitability relative to the nature of its business, limiting its ability to absorb higher loan losses and generate capital. This is partially due to its mutuality - where owners are also customers - with benefits returned to members through loan and deposit pricing. Limited economies of scale and a focus on customer service also weakened its operational efficiency relative to larger peers. Planned changes to First Credit Union's IT provider and the manufacturer of some products pose operational risks. Poor implementation that impairs customer service may negatively affect its franchise. However, successful implementation, including the establishment of a wholly owned insurance subsidiary, could support improved product offerings and profitability in the longer term. Fitch expects First Credit Union to maintain its capital and liquidity positions, which can offset some of these risks. Its capital ratios, both risk- and unrisk-weighted, have consistently been toward the top-end of those reported by domestic peers, although the absolute capital base is small. Cash and bank deposits made up over 40% of total assets at FYE16, with nearly 70% at call or maturing within three months. SUPPORT RATING AND SUPPORT RATING FLOOR First Credit Union's Support Rating and Support Rating Floor reflect Fitch's view that support from authorities cannot be relied upon in the event of need. The existence of a bank resolution scheme, which allows the imposition of losses on depositors and senior debt holders to recapitalise a failed institution, indicates a low propensity for the sovereign to support financial institutions, despite the scheme not applying to First Credit Union. RATING SENSITIVITIES IDRS AND VIABILITY RATING First Credit Union's IDRs and Viability Rating are sensitive to a change in the credit union's risk appetite and earnings. Ratings may be upgraded if there is a sustained improvement in risk appetite, possibly through lower-risk underwriting or a stronger risk control framework, while maintaining strong capital ratios and high liquidity. Positive rating action may also occur if earnings become more commensurate with the level of risk assumed by First Credit Union. Alternatively, ratings are likely to face downward pressure if there is a weakening in First Credit Union's risk appetite, possibly due to a deterioration in underwriting standards that increases the risk of significant deterioration or greater volatility in key financial metrics. SUPPORT RATING AND SUPPORT RATING FLOOR The Support Rating and Support Rating Floor are sensitive to changes in assumptions around the propensity or ability of the New Zealand authorities to provide timely support to First Credit Union. The existence of a bank resolution framework means Fitch is unlikely to upgrade these ratings. The rating actions are as follows: First Credit Union Long-Term IDR published at 'BB'; Outlook Stable Short-Term IDR published at 'B' Viability Rating published at 'bb' Support Rating published at '5' Support Rating Floor published at 'No Floor' Contact: Primary Analyst Tim Roche Senior Director +61 2 8256 0310 Fitch Australia Pty Ltd, Level 15, 77 King Street, Sydney NSW 2000 Secondary Analyst Jack Do Director +61 2 8256 0355 Committee Chairperson Parson Singha Senior Director +66 2108 0151 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation 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. 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. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. 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. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes 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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