Credit Union Baywide, which has 16 branches throughout the central and lower North Island, has had its ratings lifted from BB from BB- by Standard and Poors.
The ratings agency says that CU Baywide's asset quality has improved in recent years, as indicated by reduced credit losses, driven by a cyclically benign economic environment and structural changes to its loan portfolio.
In the six months to Decembere 31, 2015, non-performing loans declined nominally, from $5 million to $3.1 million (2.31% to 1.39% as a proportion of customer loans). In addition, the credit union's net charge-offs declined as a proportion of the agency's expected through-the-cycle losses to 43% from 53%.
In contrast, CU Baywide's non-performing loans were 2.33% of gross loans with net charge-offs at 124% of the agency's expected through-the-cycle loss rate as of June 30, 2014.
"We believe CU Baywide's improving asset quality is largely attributable to the benign economic environment, aided by a structural shift in the credit union's focus toward marginally lower-risk lending. The current economic cycle of falling interest rates and house price growth remains supportive of loan serviceability and recoveries."
S&P says "a movement to residential mortgages and the resolution of larger exposures acquired during recent mergers has also contributed to improved asset quality."
"The predominance of mortgages with loan-to-values (LVR) above 80% (which form about 55% of total mortgages not insured by Housing NZ Corporation, and 45% of gross loans) reflects CU Baywide's strategy and positioning in the market-offering competitive interest rates and lending to customers with low initial equity and, therefore, less attractive to mainstream banks."
"CU Baywide's strategic move to increase its focus on residential mortgage lending has helped the credit union maintain good business growth and has marginally contributed to its improved asset quality. We understand that a number of CU Baywide's customers refinance with larger banks when their loans amortise below 80%; we consider this reflects the relatively good underlying credit quality of the borrowers in this segment but also the persistent challenges CU Baywide's faces in retaining business."
A warning though is that CU Baywide's high LVR residential mortgage portfolio makes it more sensitive than the mainstream banks to adverse economic pressures that could cause a downturn in New Zealand property prices.
"As such, we expect that any deterioration in general economic conditions would make CU Baywide's asset quality metrics susceptible to a quick deterioration."
S&P says because the outlook is stable, it is unlikely to change its rating on CU Baywide in the next year. "We believe there is room for a modest weakening in asset quality indicators before this starts putting pressure on the rating. The stable outlook also reflects our expectation that CUB will maintain a very high level of capitalisation, and that there will be no material change in its business position or funding and liquidity."
S&P says it is unlikely to upgrade CU Baywide over the next year.
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