Southern Cross Building Society gets BB rating; Able to enter new guarantee scheme

Southern Cross Building Society (SCBS) has become the first building society in New Zealand to receive a credit rating from Standard & Poor's. SCBS has been given a BB long term credit rating, which means it will be eligible to enter into the revised deposit guarantee scheme when the current one ends in October 2010. SCBS also received a B short term rating. The government announced the extension to the retail deposit guarantee earlier this week, but set a floor on entry, requiring deposit-takers had a BB credit rating or better. The requirement will come into effect on October 13, 2010, with the current scheme still to run for over a year. There are also a number of building societies who have credit ratings from Fitch. They are Wairarapa Building Society, with BB+; Nelson Building Society, with BB; and Hastings Building Society, with BB.

Although the BB rating would allow SCBS into the extended deposit guarantee scheme, it is still considered a 'sub-investment grade' rating. S&P said the rating reflected its opinion of the concentration of SCBS's customers in the higher-risk sectors of rural and commercial lending. S&P also noted that due to the current economic environment, there had been an increase in SCBS's non-performing assets. However, these risks were mitigated by a sizeable portfolio of residential loans, manageable loan-to-value ratios and proactive management of the portfolio in the weakening environment, S&P said. S&P also noted that SCBS was free of related party concerns. Here is the release from Standard and Poor's:

Standard & Poor's Ratings Services said today that it had assigned its 'BB' long-term and 'B' short-term ratings to Southern Cross Building Society (SCBS), New Zealand's third-largest building society. The rating outlook is stable. SCBS, operating since 1923, is the first building society in New Zealand to be rated by Standard & Poor's. The ratings on SCBS partly reflect our opinion of the concentration of SCBS's customers in the higher-risk sectors of rural and commercial lending. Furthermore, in the current economic environment, there has been an increase in SCBS's nonperforming assets. These risks are mitigated by SCBS's sizeable portfolio of residential loans, manageable loan-to-value ratios, and proactive management of the portfolio in the weakening environment. Given SCBS is undergoing a cultural and strategic change and faces an uncertain operating environment, the building society is exposed to a degree of risk. However, unlike some non-bank deposit-taker peers in New Zealand, SCBS is free of related-party concerns. What's more, its governance framework, which has been revamped under the new board and management, compares favorably to many other entities in the sector. "Importantly, the ratings on SCBS benefit from the building society's solid retail funding base and sound capital ratios," Standard & Poor's credit analyst Gavin Gunning said. "We note, however, the absolute size of SCBS's capital is small by international standards, affording moderate protection against major operational or other negative risk events, should they arise." "A weakening of SCBS's financial profile"”most likely due to the negative effects of a weaker-than-expected economic outlook on asset quality and earnings"”could lead to a lowering of the 'BB' rating," added Mr Gunning. "Conversely, an increase to 'BB+' may be possible in the medium-to-long term if economic conditions improve, industry volatility moderates, and SCBS strengthens its business and financial profiles."