Bank of Queensland (BOQ) shares jumped more than 1% yesterday after its credit rating was upgraded by the Moody’s rating agency as part of a big pat on the head for our regional banks.
The upgrade came at the same time as Moody’s reaffirmed its A1 rating for Suncorp (SUN) and its A2 rating on Bendigo and Adelaide Bank (BEN).
Moody’s lifted its rating on BOQ to A3 from Baa1, citing the bank’s moves to strengthen its balance and lift credit quality by offloading bad loans.
That saw the bank’s shares rise 1.2% to $12.49.
Moody’s move follows an upgrade from Standard & Poor’s last year.
Bank of Qld CEO Stuart Grimshaw said the upgrade would help reduce the funding cost gap between it and the big four banks, the Commonwealth Bank, Westpac, NAB and ANZ.
"We are operating in a market where the Big Four banks hold considerable advantages over the rest of the market as their ‘too big to fail’ status significantly lowers their funding costs," Mr Grimshaw said.
"A higher credit rating goes some way towards partially reducing this funding cost gap and increases the range of funding opportunities available to us."
BOQ Vs BEN Vs SUN 1Y – Good news from Moody’s for our regional banks
In 2012, Bank of Queensland became the first Australian bank to post a loss in 20 years, caused by exposure to soured loans in Queensland, as was Suncorp’s subsidiary, Metway.
But Bank of Qld changed CEO and senior managers, and parts of the board, cut costs (all part of the big one off loss) involved with an expansion into other states, and raised $450 million in fresh capital in 2012, as part of moves to clean up its balance sheet.
In October it posted a cash profit of $250.9 million, and it is tipped to record further profit growth when it reports its interim result next month.
Moody’s analyst Frank Mirenzi said the bank was now benefiting from these decisions.
"The upgrade reflects BOQ’s improved credit risk profile and balance sheet strength," Mr Mirenzi said yesterday.
"BOQ’s new management has taken proactive steps to address the bank’s legacy asset quality issues, by selling large non-performing loans, raising capital and thereby strengthening its balance sheet.
"The benefits of these actions are now evident, with profitability restored and new non-performing loans trending lower. Both of these factors will enable the bank to generate capital and maintain its current strong capitalization.
"BOQ’s profit outlook is good, supported by stronger asset quality and a lower business risk profile. Moody’s expects that, over the current business cycle, BOQ will generate profitability returns in line with its Australian regional bank peers.
"Cost control is a credit positive, with the cost-to-income ratio remaining at low levels, despite the numerous process improvement projects that are in progress.
"However net interest margins are likely to remain under pressure in the current low interest rate environment, and funding costs should remain more expensive for regional and smaller lenders compared to the major banks.
"Nonetheless, the bank’s regulatory capital ratios have improved significantly as a result of earlier capital raisings and increased organic capital generation. In addition, the low credit growth environment has resulted in its risk weighted assets remaining static," Moody’s said yesterday.
Helping has been the recovery in property prices, although the rebound hasn’t been as strong in Brisbane as in Sydney and Melbourne.
On Suncorp Metway, Moody’s said yesterday:
"Moody’s notes that continued positive momentum in the bank’s fundamentals is exerting upward rating pressure on its baa2 baseline credit assessment, which reflects its standalone credit profile.
"SML has effectively dealt with its legacy non-core portfolio", Mr Mirenzi said.
"This has improved its asset quality. It will also support SML’s profitability outlook, as impairment and loan-loss charges had been a significant constraint on profitability.
"These improvements are factored into our current baa2 stand-alone assessment of the bank", says Mirenzi. "SML’s A1 credit rating further incorporates the high potential for intergroup support, arising from its core position within the Suncorp group.
"Moody’s notes that SML now intends to maintain a lower-risk business profile and to focus on efficiency measures to further boost profitability.
"Evidence of a return to stable and sustainable profitability; an improving funding and liquidity profile; and a demonstrable commitment to maintaining a lower risk profile, would all provide future upward pressure on its stand-alone credit assessment," Mr Mirenzi said.
Suncorp shares rose 1% to $14.37.
And for Bendigo and Adelaide Bank, Moody’s said:
"BEN’s ratings reflect its well-developed franchise, centered around community banking, that supports in turn its deposit gathering abilities.
"BEN has a conservative management that has historically focused on low-risk lending, which has contributed to greater asset quality stability over time. This is a key factor underpinning the bank’s relatively high rating.
"Reflective of its low risk profile, BEN’s earnings and provisioning coverage are not high, but have been adequate on a risk-adjusted basis through the cycle.
"Whilst BEN’s ratings are high, its credit profile is constrained by the challenges facing regional and smaller lenders, namely significant competitive pressures in the current low growth environment. Additionally the bank’s capitalization is at the lower end of its peer group," said Mr Mirenzi.
Bendigo shares went against the trend, easing a cent to $11.17.
