Heartland credit rating lifted a notch, other NZ owned financial institutions' ratings affirmed by Fitch

Fitch has upgraded its long-term credit rating on Heartland Bank by one notch to BBB citing Heartland's ongoing reduction of non-core property assets, which is both improving the quality of its assets and increasing earnings.

At the same time Fitch has affirmed its ratings on five other New Zealand financial institutions. It has affirmed TSB's long-term rating at A-, SBS' at BBB, the Co-operative Bank's at BBB-, and both the Nelson Building Society and Wairarapa Building Society at BB+. All ratings, including Heartland's, have stable outlooks.

Fitch said Heartland's previously troublesome non-core property portfolio, inherited from Marac Finance, is likely to stand at just $26 million by the end of calendar year 2014, down from $41 million at June 30.

 "At this point the portfolio would be unlikely to present a material risk to the bank's capitalisation and profitability," Fitch said.

Heartland's funding and liquidity profile was described as adequate for its rating level.

"It makes greater use of wholesale funding relative to most of its domestic peers, with a loan/deposit ratio of 116% at June, leaving it somewhat susceptible to investor confidence. In addition, Heartland's on-balance sheet liquidity is lower than domestic peers. This risk is partly offset by Heartland's shorter duration loan portfolio. Around 53% of Heartland's liabilities maturing within 12 months are covered by maturing assets at June," said Fitch.

Fitch's upgrade of Heartland to BBB from BBB- comes after rival Standard & Poor's made the same move in May. A BBB- rating is both Fitch and S&P's lowest investment grade rating. See credit ratings explained here.

'Simple and transparent business models'

More broadly Fitch said all six entities are small financial institutions with simple and transparent business models. All bar Heartland have residential mortgages as their main focus. Heartland targets the likes of motor vehicle finance, invoice and equipment finance and reverse equity mortgages.

"This gives Heartland relatively greater pricing power in its target markets. The other banks have relatively small national franchises and are price-takers, although most enjoy a level of community support in their home regions," said Fitch.

"All entities have strong capital ratios relative to international peers. Nevertheless, most have limited access to capital given their ownership structures - either mutual or owned by community trusts. Heartland is owned by a holding company, which is publicly listed in New Zealand and could allow it access to equity capital from the market if needed."

Aside from Fitch's long-term issuer default rating, or IDR, of BBB, it also has a short-term issuer default rating of F2 on Heartland up from F3, and a viability rating, or VR, of bbb up from bbb-.

The credit rating agency says all Heartland's ratings are sensitive to changes in its company profile and risk appetite.

"A weaker company profile - mainly reflected in its business model and franchise, could impact the bank's earnings performance and could lead to a change in risk appetite, placing negative pressure on Heartland's asset quality and/or capital, funding and liquidity positions. Positive rating action is unlikely in the short- to medium-term."

Here's what Fitch said about TSB

TSB's conservative risk appetite has led to its consistently sound asset quality and profitability, which have been above industry average over the past decade. TSB's conservative risk appetite combined with its simple business model has resulted in a strong balance sheet structure and sustainable operating performance. TSB's liquidity, funding and capital positions are good for an institution of its size and are strong relative to international and domestic peers. The ratings also take into account TSB's small domestic franchise, geographic concentration and limited access to new capital.

TSB's business model has been strongly influenced by the bank's conservative risk appetite which reflects the bank's tight underwriting standards, careful expansion outside its home region as well as holding a sizeable securities portfolio which supports the bank's exceptional liquidity position.

RATING SENSITIVITIES - IDRs AND VR

TSB's IDRs and VR are sensitive to a change in the bank's risk appetite. An increased risk profile, reflected in weaker underwriting standards and/ or risk controls, or a substantial increase in asset growth could lead to deterioration in asset quality, operating performance and capitalisation which may result in negative rating actions. Positive rating momentum would require significant improvements in the bank's franchise while maintaining its current business model and risk appetite which is unlikely in the short- to medium-term.

Here's what Fitch said about SBS

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.

Asset quality has improved with the work out of problem loans and tighter underwriting standards over the last four years, and supported stronger earnings and profitability. Capital ratios include solid buffers over regulatory minimums. Fitch's Core Capital (FCC) ratio was 13.35% at FYE14 (financial year end), versus FYE13's 12.95%, and SBS was stronger than international peers, measured by the tangible common equity to tangible assets ratio.

RATING SENSITIVITIES - IDRs AND VR

An upgrade to SBS's IDRs, VR and senior debt ratings 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 and could be equalised with the IDR should the level of subordination decrease.

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.

Here's what Fitch said about the Co-operative Bank Limited

KEY RATING DRIVERS - IDRs AND VR

Co-op's IDRs and VR are limited by the bank's low, but improving profitability relative to domestic peers, an area which management seeks to address through a five year strategic plan. Continued strengthening in profitability is likely as the bank progresses its strategic plan, although a more significant sustainable improvement may take some time. Profitability is therefore likely to lag domestic peers in the financial year ended 31 March 2015 (FY15).

The bank's medium term strategic objectives are clearly articulated by management. Although it has performed well against the objectives to date, the brand and strategic goals are still relatively new and a longer term track record has not been established. Expansion, particularly into the Auckland market has been approached cautiously, reflective of the banks modest risk appetite.

The VR is supported by strong capitalisation relative to peers and solid asset quality which has continued to remain stable. The FCC ratio was 15.8% at FYE14 and is unlikely to deteriorate materially despite the bank's growth ambitions. The impaired loan ratio of 0.2% also compares favourably against local and international peers.

RATING SENSITIVITIES - IDRs AND VR

Positive rating action would require a sustainable and significant improvement in profitability whilst maintaining current strong levels of capitalisation, sound funding and modest risk appetite. Negative rating action may result should the bank weaken its risk appetite and the FCC ratio significantly decline as part of its growth strategy. A material deterioration in Co-op's operating environment, placing pressure on asset quality and potentially eroding the bank's capital base would also place downward pressure on the bank's ratings.

Here's what Fitch said about the Nelson Building Society

KEY RATING DRIVERS - IDRs AND VR

NBS's IDR, VR and Stable Outlook reflect the society's consistently strong operating performance, solid asset quality, and stable funding and liquidity profiles. The main constraints on the ratings are the society's moderate franchise which can limit pricing power and competitive advantages, its small absolute size which increases concentration risks, and below peer capitalisation and leverage.

NBS's performance in the face of intense competition has been very strong with higher operating profits from good loan growth and wider net interest margins. However, as a mutual institution, NBS has limited capital raising options and rapid loan growth has pressured capital ratios. Capital ratios are lower than domestic peers but stronger than more highly rated international peers.

RATING SENSITIVITIES - IDRs AND VR

An upgrade to NBS's IDR and VR would require the society to improve the value of its franchise, decrease its concentrations and strengthen its capital position. A negative rating action could occur if asset quality unexpectedly deteriorated due to its large single-name or geographic concentrations, or because of poorly managed expansion and loan growth.

And here's what Fitch said about the Wairarapa Building Society

KEY RATING DRIVERS - IDRs AND VR

WBS's IDR, VR and Stable Outlook reflect the society's moderate franchise, good asset performance and adequate capital ratios containing satisfactory buffers over regulatory minimums, offset by large loan and investment property exposures for an institution of its size.

WBS's conservative underwriting approach is reflected in the performance of its loan book despite significant single name concentration. Capital ratios are high relative to peers but Fitch views this as appropriate given WBS's small absolute capital base, limited capital raising options and large loan concentrations.

RATING SENSITIVITIES - IDRs AND VR

WBS's IDR and VR are unlikely to be upgraded due to the society's small absolute capital base, small domestic franchise, and geographic and large-loan concentrations. A negative rating action could occur if asset quality unexpectedly declined leading to capital erosion.

Meanwhile, Fitch said its ratings reflect while support from the New Zealand government is possible in troubled times, it can't be relied upon.

"In Fitch's view, the introduction of the Open Bank Resolution Scheme (OBR) from 1 July 2013 reduces the propensity of the sovereign to support its banks. The OBR allows for the imposition of losses on depositors and senior debt holders to make up capital shortfalls if a deposit-taking institution has failed."

And here's Fitch's full list of ratings actions

TSB Bank Limited

Long-Term IDR affirmed at 'A-'; Outlook Stable

Short-Term IDR affirmed at 'F2'

Viability Rating affirmed at 'a-'

Support Rating affirmed at '5'

Support Rating Floor affirmed at 'No Floor'

 

Heartland Bank Limited:

Long-Term IDR upgraded to 'BBB' from 'BBB-'; Outlook Stable;

Short-Term IDR upgraded to 'F2' from 'F3';

Viability Rating upgraded to 'bbb' from 'bbb-';

Support Rating affirmed at '5'; and

Support Rating Floor affirmed at 'No Floor'.

 

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 'No Floor';

Commercial Paper affirmed at 'F2'; and

Long-Term senior unsecured debt (deposit notes) affirmed at 'BBB+'.

 

The Co-operative Bank Limited

Long-Term IDR affirmed at 'BBB-'; Outlook Stable;

Short-Term IDR affirmed at 'F3';

Viability Rating affirmed at 'bbb-';

Support Rating affirmed at '5'; and

Support Rating Floor affirmed at 'No Floor'.

 

Nelson Building Society:

Long-Term IDR affirmed at 'BB+'; Outlook Stable;

Short-Term IDR affirmed at 'B';

Local Currency Long-Term IDR affirmed at 'BB+'; Outlook Stable;

Local Currency Short-Term IDR affirmed at 'B';

Viability Rating affirmed at 'bb+';

Support Rating affirmed at '5'; and

Support Rating Floor affirmed at 'No Floor'.

 

Wairarapa Building Society:

Long-Term IDR affirmed at 'BB+'; Outlook Stable;

Short-Term IDR affirmed at 'B';

Local Currency Long-Term IDR affirmed at 'BB+'; Outlook Stable;

Local Currency Short-Term IDR affirmed at 'B';

Viability Rating affirmed at 'bb+';

Support Rating affirmed at '5'; and

Support Rating Floor affirmed at 'No Floor'.