June 9, 2017 / 4:38 AM / a year 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 Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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