Credit Union South has started its new FitchRatings with a BB rating and a stable outlook.
The Dunedin-based credit union, which covers all of the South Island, moved from Standard & Poor's to Fitch in November.
In a report, Fitch said CU South's longer-term issuer default rating (IDR) at BB and viability rating at ``bb'' reflected its higher risk appetite than most of its domestic peers, shown in its focus on consumer lending.
``This increases the susceptibility of its loan performance to a weaker operating environment relative to peers that have a greater exposure to residential mortgages.''
CU South's risk controls were adequate for its size and consistent with its regional peers, but were not as developed as larger New Zealand lenders, Fitch said.
The credit union's earnings and profitability were likely to be variable over an economic cycle, reflecting its risk profile. The credit union maintained strong net-interest margins relative to its peers, reflecting its higher-margin business mix.
Its overall profitability was modest because of a high cost base, due in part to its mutuality - where owners were customers. It also reflected limited economies of scale.
Targeted investment in technology to increase digital distribution capabilities could support profitability in the longer-term, Fitch said.
Credit Union South was likely to maintain sound capital and liquidity positions. Access to fresh capital was limited to retained earnings due to its mutual ownership, which, combined with a small absolute capital base, meant it expected the credit union to maintain capital ratios above those of larger peers.
The credit union's risk-weighted capital ratios appeared to be adequate for its risk profile, although they had deteriorated in recent years due to loan growth and low levels of profitability. Further falls were possible, Fitch said.
Wholesale funding - through a bank warehouse facility - had been used to fund loan growth as deposit levels fell in the financial year to June, causing an increase in the loan-to-deposit ratio.
Fitch expected retail deposits to remain the credit union's main funding source. A substantial increase in the use of wholesale funding might place some downward pressure on ratings.
Credit Union South did not have access to the Reserve Bank of New Zealand's central bank repurchase facility and liquidity was managed through trust deed requirements.
However, the credit union had adequate on-balance sheet liquidity, held either as cash or deposits.
