OREANDA-NEWS. S&P Global Ratings today said it has revised its outlook on Qudos Mutual Ltd. (Qudos) to positive from stable. At the same time, we affirmed our 'BBB/A-2' ratings on the bank.

In our view, Qudos' strategic rebranding and investment into its digital platform has started to gain traction, although the most significant investment in technology will occur over the next 12 to 18 months. The development and implementation of a new core banking platform and automated loan processing system exposes the bank to significant operational risk over the next year, heightening its risk profile relative to peers. However, the successful completion of these technological advancements is likely to support its risk management capability and business franchise. As such, we assess the bank as having a one-in-three chance of an upgrade in the next one to two years as it implements new technology.

The ratings on Qudos reflect its very strong capitalization and good credit loss experience, benefiting from a focus on residential mortgages to a core customer base in the airline industry. Offsetting these factors is the bank's tiny market share, which makes it highly susceptible to competition for both loans and retail deposits. In our view, its loan portfolio has increased at the cost to its liquidity and capitalization, which were high relative to peers. In many regards, the bank's competitive point of differentiation is diminishing as its operations become more characteristic of the overall industry, namely through its high use of brokers, increased use of wholesale funding, and widening customer base. In our opinion, and similar to peers, Qudos is likely to face strong competitive pressure as it moves away from its traditional common bond. We note that the ratings on Qudos don't benefit from additional extraordinary support or additional factors given it is not part of a wider group, a government-related enterprise, systemically important, or an outlier in its industry.

The positive outlook reflects a one-in-three chance that we will raise the long-term issuer credit rating on Qudos to 'BBB+', driven by the successful implementation and leveraging of a new core banking platform and automated loan processing system. The completion of this program of work is likely to improve its risk management and operational capabilities. We expect no material change to other aspects of Qudos' credit profile including: good asset quality and a risk-adjusted capital (RAC) ratio comfortably above 15%.

We see a one-in-three change that we will raise the rating on Qudos over the later end of the next two years. We expect this scenario to emerge if the bank successfully implements and leverages its technology investments, on time and within budget. Enhanced capabilities would be evident in loan growth sustained at - or above-system, improved operating efficiencies, and sound asset quality compared to peers. Successful project execution would support a higher assessment of the bank's risk position.

We expect to revise the outlook to stable if, in our opinion, the bank does not execute the next phase of its technology investment on time and within budget. Further resumed below-system loan growth or a continued deterioration in operating performance relative to peers could also reflect weakness in the bank's product and service offering and the inability to implement strategic initiatives. This would be evidence of potential weaknesses in its long-term business franchise and put pressure on the ratings.