(The following was released by the rating agency)
-- Standard & Poor’s has assigned its ‘BBB+/A-2’ issuer credit ratings to Australian-based QT Mutual Bank Ltd. (QTMB)
-- Our ratings on QTMB reflect the anchor stand-alone credit profile for a financial institution operating only in Australia; plus QTMB’s weak business position, very strong capital and earnings, adequate risk position, below average funding, and adequate liquidity
-- The stable outlook reflects our base expectation that QTMB will continue to focus on low-risk and well-secured residential lending, and maintain its very strong projected risk-adjusted capital (RAC) ratio
On July 16, 2012, Standard & Poor’s Ratings Services assigned its ‘BBB+/A-2’ issuer credit ratings to QT Mutual Bank Ltd. The outlook on the ratings is stable.
Our ratings on QTMB reflect the anchor stand-alone credit profile (SACP) for a financial institution operating only in Australia; plus QTMB’s “weak” business position, “very strong” capital and earnings, “adequate” risk position, “below average” funding, and “adequate” liquidity.
Our bank criteria use the Bank Industry Country Risk Assessment (BICRA) economic risk and industry risk scores to determine a financial institution’s anchor SACP, the starting point in assigning an issuer credit rating. The anchor SACP for a bank operating only in Australia is ‘a-'. The BICRA score is informed by our evaluation of economic risk, whereby 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 QTMB is ‘bbb+'. QTMB’s business position is assessed as “weak”, reflecting the mutual bank’s lending and geographic concentration profile. Approximately 94% of QTMB’s loan portfolio is in well-secured residential mortgages, and given its very small (0.03%) market share, it is susceptible to competitive pressures from larger regional banks and major Australian banks--which dominate what we view as a very commoditised retail banking market. QTMB is also susceptible to any economic downturn in Queensland, with about 98% of its exposures in that Australian state. This geographic concentration is slightly offset by well diversified exposures at a sub-state level within Queensland, reflecting the population spread of QTMB’s core members (the education industry). Our assessment of QTMB’s business position recognizes QTMB’s tight common bond with teachers, with 63% of loans written to members of the education industry at May 30, 2012; however, these core members represent a much smaller portion of QTMB’s deposit base, at 43%. In addition, most customers in this demography tend to own and occupy their homes--more than 75% of QTMB’s residential lending is under this classification, and most of these customers demonstrate longstanding relationships with the mutual bank. This is consistent with stable recurring net interest income, which accounted for about 80% of total operating revenue over the past five years.
Our assessment of QTMB’s capital and earnings as “very strong” reflects our projected RAC ratio for QTMB of 22.5%-23.0% over the next 12 months, and our expectation that it will remain comfortably above 15% in the medium term. This forecast reflects the mutual’s ability to retain all earnings with no dividend requirements, offsetting most of the planned I.T. and rebranding-related expenditures over the next two years. On the other hand, our assessment is moderated by the mutual bank’s limited ability to raise additional capital compared to listed financial institutions. QTMB’s earnings are forecast to remain adequate, with an expected three-year average earnings buffer of 105 basis points (bps), even though we forecast that a degree of margin pressure may arise in response to subdued credit demand and competitive deposit rates. QTMB’s cost-to-income ratio was 69% in fiscal 2011, which is consistent with peers’; however, it is expected to marginally increase over the coming years, consistent with QTMB’s strategy to continuously reinvest to enhance the quality of service and deliver long-term value to its members.
Our assessment of QTMB’s risk position is “adequate”, reflecting QTMB’s plain vanilla business profile and its well-secured loan portfolio. Further, the education industry is viewed as an essential-service provider; thereby the annuity-type incomes that most members receive are unlikely to be materially affected in a downturn, which contributes to the resilience of QTMB’s credit risk profile. This is consistent with loan arrears that have been significantly better than industry average and charge offs that are very small, at 0.01% of customer loans at June 30, 2011. Following its rebranding as a mutual bank in October 2011, QTMB’s organic growth plans include an added focus on high net worth clients and offering business banking products. While the latter represents a new market for QTMB, exposures are constrained by tight portfolio limits. In addition, we believe this risk will be adequately supported by QTMB’s risk-management framework, which in our view is adequate given its size and complexity.
QTMB’s funding is assessed as “below average” and liquidity as “adequate”. Almost all of the mutual bank’s funding is sourced via retail deposits, representing 99% of total funding at June 30, 2012, with the balance in Cuscal Ltd.’s (A+/Stable/A-1) Integris securitisation warehouse. QTMB’s very limited reliance on wholesale funding is reflected in its loan-to-deposit ratio of 94.6% at June 30, 2011, a level that compares favourably against peers. While QTMB benefits from a sticky deposit base, we believe this could come under pressure if larger financial institutions competed more aggressively or if there were a flight to quality in a stressed scenario. For the latter, we believe a flight to quality is likely to take place irrespective of the Australian government’s deposit-guarantee scheme, which applies to all Australian Authorised Deposit-taking Institutions, due to operational delays and complexities that could potentially arise in the Australian payments system. QTMB has held high-quality liquidity assets between 13% and 14% of liabilities over calendar 2012 year-to-date, which together with other liquidity sources give QTMB adequate liquidity coverage. Furthermore, QTMB is able to call upon external support as a member of CUFSS Ltd., a mutual industry-funded and operated liquidity support scheme.
Based on QTMB’s small asset base of A$1.2 billion at March 31, 2012, representing 0.03% of system assets, we currently rate QTMB the same as its SACP, reflecting our view of the low likelihood of extraordinary government support, in the event that it is needed.
The stable outlook is based on our expectation that QTMB will continue its focus on well-secured residential mortgage loans, and maintain a tight common bond with its members and a projected RAC ratio above 15%.
The most likely scenario for a rating downgrade is a revision of QTMB’s risk-position assessment to “moderate” from “adequate”. This could arise from rapid growth that materially weakened our view of QTMB’s risk profile, or if the bank aggressively diversified into higher risk activities where it had limited experience or competitive advantage. The rating could also be lowered as a result of an unexpected large operational risk loss, particularly if it significantly undermined our current adequate view of the bank’s enterprise wide risk-management capability. Additionally, downward rating pressure could emerge within our business position assessment should any progressed mergers or organic growth materially weaken our favourable view of QTMB’s business stability, which currently benefits from its tight common member bond and good member support experience.
The rating is unlikely to be raised from the current rating level. An upward revision would require a step change in QTMB’s business position, which would necessitate a material improvement in geographic and product diversification and its overall market share that significantly strengthened our view of its business stability.
Ratings Score Snapshot
Business Position Weak (-2)
Capital and Earnings Very Strong (+2)
Risk Position Adequate (0)
Funding and Liquidity Below Average and Adequate (-1)
GRE Support 0
Group Support 0
Sovereign Support 0
Additional Factors 0
Related Criteria And Research
-- Banks: Rating Methodology And Assumptions, Nov. 9, 2011
-- Bank Capital Methodology And Assumptions, Dec. 6, 2010
-- Banking Industry Country Risk Assessment Methodology And Assumptions
QT Mutual Bank Ltd.
Counterparty credit rating BBB+/Stable/A-2