12.01.2015, 11:22
Fitch Affirms New Zealand Association of Credit Unions: 'BB+'/Stable
OREANDA-NEWS. Fitch Ratings has affirmed New Zealand Association of Credit Unions' (trading as Co-op Money NZ) Long- and Short-Term Issuer Default Ratings (IDR) at 'BB+' and 'B' respectively. The Outlook on the Long-Term IDR is Stable. A full list of rating actions can be found at the end of this commentary.
KEY RATING DRIVERS - IDRS Co-op Money NZ's ratings are constrained by its limited franchise and customer base, which is concentrated within New Zealand's credit union and building society sector. Co-op Money NZ's members account for less than 1% of the financial system and are unlikely to reach investment grade due to their level of geographical concentration and limited loss absorption capacity. In addition, absolute levels of profit and capital are also relatively low. Co-op Money NZ's low credit and market risk levels partially offset some of these factors. The outstanding legacy loan exposure of NZD399,000 was repaid in 1H15 and further recoveries are expected by FYE15. There are no plans to undertake further lending to end customers. The association mainly provides services to its member credit unions and building societies. Outside of its wholly owned insurance subsidiary, Credit Union Insurance Limited (IFS: BB+/Stable), trading as Co-op Insurance NZ, there is no direct exposure to its members' end customers. There is however some counterparty risk evident in the association's 'central banking' operations, which provide centralised liquidity management for members, giving them access to investments and returns they may not be able to obtain on a standalone basis.
The provision of 'central banking' operations remains a dominant part of Co-op Money NZ's balance sheet, accounting for 95% of assets at FYE14 and all non-equity balance sheet funding. Concentration and liquidity risk remain evident, with the two largest depositors accounting for 53% of total deposits at FYE14. However the underlying member depositors appear to have reasonable levels of liquidity outside their Co-op Money NZ holdings. The association's investments are of reasonably high quality, with the majority (FYE14: 98%) being investment grade and the remainder pertaining to unrated local councils. FY14 operating profit was up 17%, though after adjusting for an unscheduled dividend from Co-op Insurance NZ, profitability was similar to FY13. Absolute profitability levels are low and since 2010 there has been some volatility in earnings. This has been driven in part by the performance of the legacy loan portfolio but also includes discounts and other benefits provided by Co-op Money NZ to full members. The expansion of the association's non-member customer base and additional arms-length revenue sources should result in improvements to overall profitability. Co-op Money NZ's capitalisation is modest for a non-bank, with tangible common equity to tangible assets ratio improving to 9.40% at FYE14, and the absolute level remains small.
Distributions to base capital noteholders are not directly related to profitability, which could result in some volatility in capital generation. Co-op Money NZ is a trade organisation and service provider made up of 17 members and five associate members within the credit union and building society sector at FYE14. It provides transactional, IT and liquidity services, offering economies of scale benefits for customers. It also owns Co-op Insurance NZ, which currently provides life and non-life products to customers of Co-op Money NZ's members. However, Co-op Insurance NZ is seeking to expand its customer base to direct customers. RATING SENSITIVITES - IDRs Co-op Money NZ's IDRs are sensitive to developments in New Zealand's credit union and building society sector. If conditions were to materially weaken, or larger members encounter difficulties, Co-op Money NZ's ratings would face downward pressure. Negative pressure would also be placed on ratings by loss of member confidence leading to member exits. A significant diversification of Co-op Money NZ's customer base and substantial increase in absolute capital and profitability levels would be required for positive rating momentum, which is considered unlikely in the short- to medium-term.
KEY RATING DRIVERS - IDRS Co-op Money NZ's ratings are constrained by its limited franchise and customer base, which is concentrated within New Zealand's credit union and building society sector. Co-op Money NZ's members account for less than 1% of the financial system and are unlikely to reach investment grade due to their level of geographical concentration and limited loss absorption capacity. In addition, absolute levels of profit and capital are also relatively low. Co-op Money NZ's low credit and market risk levels partially offset some of these factors. The outstanding legacy loan exposure of NZD399,000 was repaid in 1H15 and further recoveries are expected by FYE15. There are no plans to undertake further lending to end customers. The association mainly provides services to its member credit unions and building societies. Outside of its wholly owned insurance subsidiary, Credit Union Insurance Limited (IFS: BB+/Stable), trading as Co-op Insurance NZ, there is no direct exposure to its members' end customers. There is however some counterparty risk evident in the association's 'central banking' operations, which provide centralised liquidity management for members, giving them access to investments and returns they may not be able to obtain on a standalone basis.
The provision of 'central banking' operations remains a dominant part of Co-op Money NZ's balance sheet, accounting for 95% of assets at FYE14 and all non-equity balance sheet funding. Concentration and liquidity risk remain evident, with the two largest depositors accounting for 53% of total deposits at FYE14. However the underlying member depositors appear to have reasonable levels of liquidity outside their Co-op Money NZ holdings. The association's investments are of reasonably high quality, with the majority (FYE14: 98%) being investment grade and the remainder pertaining to unrated local councils. FY14 operating profit was up 17%, though after adjusting for an unscheduled dividend from Co-op Insurance NZ, profitability was similar to FY13. Absolute profitability levels are low and since 2010 there has been some volatility in earnings. This has been driven in part by the performance of the legacy loan portfolio but also includes discounts and other benefits provided by Co-op Money NZ to full members. The expansion of the association's non-member customer base and additional arms-length revenue sources should result in improvements to overall profitability. Co-op Money NZ's capitalisation is modest for a non-bank, with tangible common equity to tangible assets ratio improving to 9.40% at FYE14, and the absolute level remains small.
Distributions to base capital noteholders are not directly related to profitability, which could result in some volatility in capital generation. Co-op Money NZ is a trade organisation and service provider made up of 17 members and five associate members within the credit union and building society sector at FYE14. It provides transactional, IT and liquidity services, offering economies of scale benefits for customers. It also owns Co-op Insurance NZ, which currently provides life and non-life products to customers of Co-op Money NZ's members. However, Co-op Insurance NZ is seeking to expand its customer base to direct customers. RATING SENSITIVITES - IDRs Co-op Money NZ's IDRs are sensitive to developments in New Zealand's credit union and building society sector. If conditions were to materially weaken, or larger members encounter difficulties, Co-op Money NZ's ratings would face downward pressure. Negative pressure would also be placed on ratings by loss of member confidence leading to member exits. A significant diversification of Co-op Money NZ's customer base and substantial increase in absolute capital and profitability levels would be required for positive rating momentum, which is considered unlikely in the short- to medium-term.
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