MELBOURNE: Standard & Poor's Ratings Services said today that it has affirmed its 'BBB-/A-3' issuer credit ratings (ICR) on The Rock Building Society Ltd. (The Rock) and removed them from CreditWatch with positive implications, where they were placed on Sept. 1, 2011. The outlook is positive.
The rating actions follow the announcement that The Rock had signed a merger implementation agreement with MyState Ltd. (not rated), a listed financial services company. MyState Ltd. comprises: MyState Financial Ltd. (MyState; BBB/Stable/A-2), a retail-focused Tasmanian based financial institution; Tasmanian Perpetual Trustees Ltd. (not rated), a trustee and wealth-management subsidiary; and now The Rock. The merger was completed on Dec. 12, 2011.
Under our Group Rating Methodology, The Rock has been assessed as a "highly strategic" subsidiary of the MyState group, and the long-term ICR for a "highly strategic" subsidiary is generally set one notch lower than the group credit profile (GCP). Although The Rock and MyState operate in similar businesses, primarily providing secured residential lending and household deposit products, The Rock represents about 30pc of the group's capital on a pro forma consolidated basis, and the risk-adjusted capital ratios of both businesses over the next 12 months is expected to be similar, at about 21%, The Rock has not been assessed as a "core" subsidiary of MyState due to the recent completion of the acquisition. Under our Group Rating Methodology, a newly acquired subsidiary is not usually designated as "core" during the first two years because of integration risks and the potential for new, unanticipated risks to emerge. These entities will often be designated as "core" to the group if and when they are fully integrated.
"The positive ratings outlook reflects our expectation that The Rock could be fully integrated without any significant negative operational or loss event into the MyState group over the next two years, at which point in time The Rock could be re-assessed as a "core" subsidiary of the MyState group and assigned the MyState GCP," said Standard & Poor's credit analyst Lisa Barrett. "The outlook further expects no significant deterioration in the performance of The Rock's or MyState's underlying businesses."
"Upward rating potential could be compromised should there be any significant operational or credit losses as a result of the integration process or for any other reason to the extent that it affected our assessment of the parent's capital and earnings or risk position assessments. The ratings could also be affected by a change in our assessment of MyState's GCP, stemming from the progression of its strategy to acquire or establish new retail banking businesses in regional markets in Australia."
The ratings on The Rock reflect the anchor stand-alone credit profile for a building society operating only in Australia; plus The Rock's "weak (-3)" business position, "very strong" capital and earnings, "moderate" risk position, "below average" funding, and "adequate" liquidity.
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