Credit Union North gets downgrade from S&P

Standard & Poor's Ratings Services had placed its ‘BB' long-term issuer credit rating on New Zealand-based Credit Union North on CreditWatch with negative implications. At the same time, we have affirmed the short-term rating of ‘B'.

Wednesday, July 13th 2011, 4:30PM

"The CreditWatch placement reflects our view that CUN's contracting business base could weaken the company's market position, and result in a potential loss in year ended June 30, 2011. Margin pressure, CUN's potentially higher-than-expected loan loss provisioning, and its high operating expense structure could result in CUN delivering a loss," Standard & Poor's credit analyst Andrew Mayes said. "We are completing further analysis and discussions with management to gain greater clarity on the fiscal 2011 results and to understand any management initiatives to address these business and financial pressures."

The challenging operating environment, underpinned by relatively higher levels of unemployment in CUN's main operating regions of Waikato and Bay of Plenty, and a tightening of underwriting standards have led to a material contraction in personal loans over the past year. The loan-portfolio decline reflects CUN's move to tighten its lending policies to help improve its asset quality position and risk/reward equation. Additionally, lending growth has been stymied by a period of ongoing household deleveraging, which we expect to continue to restrain organic growth in the medium term. The subdued operating environment is likely to have a more pronounced effect on lower socio-economic groups, which comprise a significant portion of CUN's member base.

A CreditWatch negative listing by Standard & Poor's implies a one-in-two likelihood that the rating may be lowered within the next three months. The CreditWatch is expected to be resolved after further discussions with CUN's management and a review of CUN's business and financial profile. The long-term issuer credit rating of ‘BB' may be lowered by one notch or more if, in our opinion, the credit union were not able to quickly stabilize its market position and business base, and restore its underlying operating performance to a level consistent with similar-rated peers and supportive of its rating. Additionally, based on the past supportive approach adopted by the credit union sector in dealing with emerging stresses in a credit union, we expect that a further material deterioration in CUN's credit profile would most likely be pre-empted with a merger with another credit union.

Check out Credit Union North's interest rates here

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