OREANDA-NEWS. Fitch Ratings has affirmed Suncorp-Metway Limited's (SML) Long- and Short-Term Issuer Default Ratings (IDR) at 'A+' and 'F1' respectively. The outlook on the Long-Term IDR is Stable. At the same time, SML's Viability Rating (VR) has been upgraded to 'a-' from 'bbb+'. A full list of rating actions can be found at the end of this commentary.

KEY RATING DRIVERS - IDRs, SUPPORT RATING AND SENIOR DEBT
The affirmations of SML's IDRs, support and senior debt rating reflect the extremely high likelihood of support from the wider Suncorp Group Limited (SGL, A/Stable) should it be required. Fitch views SML as a core member of SGL, who has the ability and propensity to provide support as reflected in the capital surplus to internal targets held within the group. SML's IDRs and Stable Outlook are aligned with those of SGL's main operating subsidiary AAI Limited (Insurer Financial Strength rating: A+/Stable).

RATING SENSITIVITIES - IDRs, SUPPORT RATING AND SENIOR DEBT
Any movement in the group's credit profile would trigger a similar action for SML. A downgrade would also be likely should Fitch no longer consider SML to be a core member of SGL. A significant reduction in SGL's ability to support SML, as measured by capital surplus to minimum targets, without a commensurate improvement in SML's standalone credit profile (measured by the VR) could also place downward pressure on ratings.

KEY RATING DRIVERS - VR
The upgrade in SML's VR reflects the sustained improvement in its financial profile since the sale of legacy exposures in 2013. The resolution of the legacy portfolio has resulted in stronger earnings, assisted by lower impairment charges and higher net interest margin. Cost efficiency has been a key focus for SML and steady progress has been made to date. Fitch expects further improvements in FY15 and FY16 with a reduction in the cost-to-income ratio to around 50%.

Asset quality has benefitted from tighter underwriting standards and a more conservative approach to loan growth. SML has focused its efforts in growing less risky mortgages and has continued to manage its SME and agribusiness exposures well. Strong mortgage growth during 2013 does not appear to have negatively impacted asset quality, which Fitch expects will remain average compared to peers, with any deterioration as a result of a weakening in the operating environment to be manageable.

SML's funding and liquidity profile has steadily improved over the last four years, with deposits now representing about 60% of total funding. The position has more recently been assisted by the maturity of wholesale funding associated with the non-core portfolio. SML makes greater use of wholesale funding relative to most of its domestic peers, leaving it more susceptible to investor confidence. Favourable market conditions supported SML's more recent issuances allowing the bank to diversify its investor base. Liquid assets, including internally securitised mortgages, cover almost all debt maturities in 2015, while the bank's liquidity coverage ratio was 119% at 31 December 2014. All liquid assets are repo-eligible with the Reserve Bank of Australia.

SML's standalone company profile is modest, with total deposit and market share representing a small portion of system assets, resulting in limited pricing power. However, the bank's franchise benefits from being part of SGL, including brand sharing, fungibility of capital for growth, cross sell capacity, and close management interaction.

RATING SENSITIVITIES - VR
Negative rating pressure could arise should SML comprise its risk appetite in the form of weaker underwriting standards, looser risk controls, and more aggressive loan growth to improve its company profile. A severe deterioration in asset quality resulting in weaker operating profitability and capitalisation could also trigger negative rating action.

Positive rating action above the current level is unlikely given SML's modest franchise and weaker funding and liquidity profiles relative to international peers.

KEY RATING DRIVERS & SENSITIVITIES - SUPPORT RATING FLOOR
The support rating floor reflects SML's limited market share and the moderate potential of government support. Support ratings are sensitive to any change in assumptions around the propensity or ability of the Australian sovereign to provide timely support to the bank, including any moves to implement the bail-in of senior creditors.

The rating actions are as follows:

Suncorp-Metway Limited (SML):

Long-Term IDR: affirmed at 'A+'; Outlook Stable;
Short-Term IDR: affirmed at 'F1';
Viability Rating: upgraded to 'a-' from 'bbb+';
Support Rating: affirmed at '1';
Support Rating Floor: affirmed at 'BB+';
AUD domestic medium-term note programme: affirmed at 'A+'/'F1';
USD15bn euro medium-term note programme: affirmed at 'A+'/'F1';
USD15bn 144A senior medium-term notes programme: 'A+'/'F1';
Senior unsecured debt: affirmed at 'A+'; and
Commercial paper: affirmed at 'F1'.