Fitch Ratings Maintains Australia’s B & E Ltd at ‘BBB+’ With A Stable Outlook

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Fitch Ratings has confirmed B & E Ltd’s ‘BBB+’ Long-Term Issuer Default Rating (IDR) of ‘BBB+’ (BOU). The outlook is positive. Fitch has also confirmed BOU’s ‘F2’ Short-Term IDR and ‘bbb+’ Viability Rating (VR).

Here is the summary of Fitch Ratings’ findings:

KEY RATING DRIVERS

Risk Profile Drives Ratings

  • BOU’s IDRs and senior debt are driven by the VR, which is supported by the bank’s risk profile.
  • BOU has a low level of impaired loans, and its asset quality compares well to that of several peers.
  • As it aims to expand further in its native state of Tasmania, we expect BOU’s loan growth to continue above the average.

Small Franchise Constraints Ratings: 

  • Despite a projection of slower GDP growth in 2023 and softening house values due to a steep rise in interest rates during 2022, the operating environment for Australian banks is expected to remain stable.
  • The reasons are low unemployment and careful loan underwriting, which are predicted to limit bank losses.

Modest Asset-Quality Weakening Expected: 

  • BOU has an asset-quality solid foundation but is susceptible to softening over the next two years due to increased interest rates and unemployment.
  • BOU’s primary statistic of stage 3/gross loans is towards the top of its peer group (FYE22), with an average of less than 0.1% for the fiscal year ending June 2022.
  • However, BOU was given an ‘a-‘ score to reflect the structural concentration risk associated with its high proportion of residential mortgages on its loan book compared to banks with higher scores and geographic concentration.

NIM Tailwinds Boost Profitability: 

  • Higher interest rates are expected to improve the company’s profitability over the next two years.
  • Rate increases will result in more significant net interest margins (NIMs) across the industry, albeit higher funding costs and competition will partially offset this.
  • Profitability lags behind that of many larger counterparts, owing to a more significant cost base due to a lack of economies of scale and its standard ownership structure.

Sound Capitalisation:

  • Fitch anticipates that BOU’s CET1 ratio of 14.3% will sustain a capital score of ‘bbb+’.
  • The bank’s core measure suggests an ‘a’ grade. Still, due to the mutual ownership structure, we lower it to reflect its modest absolute capital base (USD63 million at FYE22) and limited flexibility in raising new capital.

Solid Deposit Funding Base: 

  • Fitch anticipates BOU’s funding profile, primarily made up of deposits, to remain constant over the next two years.
  • The bank’s four-year average of loans/customer deposits, 92% in FY22, suggests an ‘a’ rating. However, we reduce it to ‘bbb+’ because we expect BOU to have more significant funding costs in a stressed scenario than larger rivals.

In terms of the variables that can lead to an adverse result on rating, Fitch said:

“BOU’s IDRs and VR could be downgraded if the bank’s risk appetite were to increase, possibly through a loosening of underwriting standards or risk controls in the pursuit of growth, although we do not expect this to occur.”

BOU’s ratings could be reduced if the bank’s financial indicators continue to deteriorate, which is reflected in one of the following: 

  • a rise in stage 3 loans/gross loans ratio above 3% for an extended time; 
  • a fall in operational profit/risk-weighted assets ratio below 0.5% over an extended period; 
  • or a CET1 ratio below 10% without a realistic plan to raise it back up.

“Positive action on the GSR would require a significant improvement in BOU’s market position, such that its market share rises to around 1%. An upgrade of this rating is unlikely to affect BOU’s Long-Term IDR, which is currently driven by its standalone credit strength.”

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