OREANDA-NEWS. Fitch Ratings has assigned a final rating of 'BBB' to Heritage Bank Limited's (Heritage; BBB+/Stable) AUD50m Basel III-compliant Tier 2 subordinated notes, which have been issued under the bank's AUD2bn debt issuance programme. The notes are the first instrument of its type to be issued by an Australian mutual financial institution.

The notes mature on 24 June 2025, although early redemption is possible after five years in 2020 and each interest payment date thereafter, subject to prior written approval by the Australian Prudential Regulation Authority (APRA). The notes include a non-viability clause, and will qualify as regulatory Tier 2 capital for Heritage.

KEY RATING DRIVERS - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The sub debt instrument is rated one notch below Heritage's Viability Rating (VR) of 'bbb+', to reflect its below-average-recovery prospects compared with senior unsecured instruments. The notes would be subject to a partial or full write-off should APRA deem that Heritage would become non-viable without a write-off. Full write-off would be triggered should Heritage require a public-sector injection of capital to avoid non-viability. No additional notching from the VR for non-performance is applied, as the VR already captures the point of non-viability. The instrument does not qualify for any equity credit under Fitch's methodology.

RATING SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Heritage's sub debt ratings are broadly sensitive to the same considerations that might affect the bank's VR.

Negative rating pressure could arise should Heritage weaken underwriting standards, relax risk controls and undertake more aggressive loan growth in order to improve its company profile. A severe deterioration in asset quality could result in weaker operating profitability and threaten capitalisation, which would be likely to trigger negative rating action.