The credit union covers the South Island.
S&P analyst Andrew Mayes said the change in Credit Union South's long-term issuer credit rating reflected the opinion the recently observed contraction in lending and operating revenue had reached the bottom for the credit union, with growth anticipated for both in 2015.
''We also expect earnings to be positively impacted by an absence of one-off costs that detracted from the credit union's earnings in fiscal 2014.''
In raising the rating, S&P believed the credit union's management had successfully managed it into a forecast period of positive momentum in both lending and operating revenue growth - in contrast to the declining performance from 2010-13, he said.
Importantly, much of the improved growth could be attributed to a range of initiatives undertaken in recent years in an attempt to generate more commercially acceptable outcomes.
That should augur well for the credit union in the medium-term term as the broader operating environment improved, especially as a result of the rebuild activity in Christchurch, Mr Mayes said.
Credit Union South chief executive Tania Dickie said the focus on growth was achieved through retaining existing member loans and extending lending to members.
''This strategy was highly successful, with a 15% increase in personal loans for the year ending June 2014.''
However, the outlook on Credit Union South was negative, reflecting the view New Zealand's economic risks, including its material dependence on external borrowings, persistent current account deficits and recent growth in house prices in some of the larger cities, could worsen, Mr Mayes said.
Should New Zealand's economic vulnerabilities worsen within the next one to two years, and S&P lowered the anchor stand-alone credit profile for a bank operating within New Zealand, the rating on Credit Union South was likely to be lowered by one notch to reflect the lower anchor.
The anchor formed the starting point of the issuer credit rating of the credit union, he said.
''We believe downward rating pressure would also arise if Credit Union South were to experience a return to negative growth in lending volumes to support its ongoing business viability, or if it lost the deposit support it currently enjoys from its member base.''
S&P could revise its outlook on the credit union back to stable if it formed a view uncertainties around New Zealand's economic risks had abated, Mr Mayes said.
Ms Dickie said the negative outlook reflected concern strong house price growth in New Zealand and the country's high reliance on foreign debt heightened the risk of a sharp downturn in the broader economic environment.
That could subsequently result in credit losses and a drop in profitability for the broader financial services sector.
At a glance
Credit Union South
• Rating raised to BB on improved business performance
• Outlook lowered to negative on back of New Zealand's economic risks
• Management initiatives augur well for the future
• More lending to members part of the improvement
