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Fitch Affirms Heartland Bank at 'BBB'; Outlook Stable
October 11, 2016 / 2:01 AM / in a year

Fitch Affirms Heartland Bank at 'BBB'; Outlook Stable

(The following statement was released by the rating agency) SYDNEY, October 10 (Fitch) Fitch Ratings has affirmed New Zealand-based Heartland Bank Limited's (HBL) Long-Term Issuer Default Rating (IDR) at 'BBB' with a Stable Outlook, its Short-Term IDR at 'F2' and its Viability Rating at 'bbb'. The bank's Support Rating has also been affirmed at '5' and its Support Rating Floor at 'No Floor'. The affirmation of HBL's IDRs and Viability Rating reflects the continued improvement in its underwriting standards and risk-controls, especially in light of its higher risk appetite relative to peers. The bank focuses on niche markets, where it has achieved a leading franchise and benefits from price-setting powers. This has resulted in a strong net interest margin relative to peers, offsetting the higher risk associated with some of its lending products. The Stable Outlook reflects our view that HBL is likely to continue its solid performance over the next year or two, based on the company's primarily organic growth. A significant acquisition is likely to trigger a review of the ratings. Fitch expects New Zealand's operating environment to remain stable in the absence of a significant external shock. However, macroeconomic risks are rising due to mounting household debt and weak dairy prices. KEY RATING DRIVERS IDRS AND VIABILITY RATING HBL's Long- and Short-Term IDRs and Viability Rating reflect its continuing strengthened risk-management practices, which should support asset-quality through the cycle. However, HBL's risk appetite remains higher relative to peers - especially given the bank's growth aspiration and customer target groups - this is a constraint on HBL's rating. HBL continued to reduce its non-core property finance portfolio and any losses from this portfolio will be immaterial. HBL has a simple and transparent business model. It operates in New Zealand and Australia, focusing on niche markets, such as vehicle-finance for households and businesses, home-equity release (HER) mortgages as well as equipment, livestock and invoice finance for businesses. The bank's organisational structure changed at end-2015 following the amalgamation of HBL with its previous shareholder, Heartland New Zealand Limited (HNZ), and HBL became the sole shareholder of all subsidiaries previously owned by HNZ. The restructure removed group inefficiencies and increased the bank's earning streams as well as geographical and business diversification. The effect on HBL's capitalisation and market risk has been modest. Overall, Fitch views the group restructure neutral to HBL's ratings. HBL's funding and liquidity profile is satisfactory for its rating level. The bank benefits from a more balanced asset-liability-maturity profile relative to domestic peers, as its lending products typically have shorter maturities, although HBL's HER mortgages have lengthened its asset maturity by reducing the portion of assets maturing within 12 months. HBL's on-balance sheet liquidity is adequate, consisting of cash and securities only. The bank has no internal securitisation capabilities for residential mortgage-backed securities due to its limited standard residential mortgages exposure. Fitch sees HBL's capitalisation as adequate, considering its risk appetite and the agency's expectation of the bank's asset-quality and earnings performance through a full credit cycle. The bank benefits from sound levels of retained earnings, although asset-growth has consistently outpaced internal capital generation for the past three years. HBL can adjust its dividend payout by increasing share discount for its dividend re-investment plan, which improves capital flexibility. The group restructure has resulted in a manageable increase in risk-weighted assets affecting regulatory capital ratios, which Fitch expects to be offset through retained earnings. However, HBL's growth aspirations and new capital rules on HER mortgages may add some modest pressure to its capital ratios. HBL has access to equity markets and successfully raised fresh common equity in 2014, in contrast to its domestic peers. SUPPORT RATING AND SUPPORT RATING FLOOR HBL's Support Rating and Support Rating Floor reflect Fitch's view that while support from the New Zealand sovereign (AA/Stable) is possible, it cannot be relied on. We believe the Open Bank Resolution (OBR) scheme reduces the propensity of the sovereign to support its banks. The OBR scheme allows for the imposition of losses on depositors and senior debt holders to make up capital shortfalls if a deposit-taking institution fails. RATING SENSITIVITIES IDRS AND VIABILITY RATING HBL's IDRs and Viability Rating are sensitive to changes in the bank's risk appetite and funding and liquidity positions, especially if HBL expands its franchise into new and existing market segments by compromising its improved risk-management practices. Sustaining a more aggressive growth strategy over a long period could weaken HBL's financial profile and pressure its Viability Rating and IDRs. Positive rating action is not probable in the short- to medium-term. SUPPORT RATING AND SUPPORT RATING FLOOR HBL's Support Rating and Support Rating Floor are sensitive to change in assumptions around the propensity or ability of the New Zealand sovereign to provide timely support to HBL. Contact: Primary Analyst Andrea Jaehne Director +61 2 8256 0343 Fitch Australia Pty Ltd Level 15, 77 King Street, Sydney NSW 2000 Secondary Analyst Tim Roche Senior Director +61 2 8256 0310 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. 15 Jul 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1012916 Solicitation Status here 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. 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 © 2016 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. 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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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