MYSTATE LIMITED
Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) of 'BBB+', Short-Term IDRs of 'F2', Viability Ratings (VRs) of 'bbb+' and Government Support Ratings (GSRs) of 'ns' assigned to
The Outlook on the Long-Term IDRs is Stable.
Key Rating Drivers
Consolidated Assessment: The ratings on MYS and its bank subsidiary MSB are driven by the group's consolidated financial profile, which is dominated by MSB, the only licenced banking entity in the group. MSB accounted for 99% of group assets at
The Long-Term IDRs are driven by the group VR, which is in line with the implied VR, and reflects strong, stable asset quality and profitability metrics that are higher than those of other small Fitch-rated Australian banks. These are offset by the group's small market position and a greater reliance on wholesale funding than peers, which tend to have larger deposit-funding bases.
Low Double Leverage: MYS's VR is aligned with the group VR as we view the failure risk of the holding company as substantially the same as that of the group as a whole. This is underpinned by our expectation that MYS will maintain double leverage at around 100%, well below the 120% threshold in Fitch's Bank Rating Criteria.
Economic Growth to Slow: Fitch expects high inflation and a rapid increase in interest rates to result in slower economic growth and an increase in unemployment in 2024 in
Simple Business Model: MYS has a focus on traditional banking, in particular low-risk mortgages, resulting in good asset quality and modest earnings volatility. This offsets the small market share (0.2% of banking system assets at
Low Risk Mortgage Focus: MYS has sound underwriting standards, focusing on low-risk residential mortgages, which in turn supports good asset quality. However, the group maintains strong loan growth aspirations. We expect the bank to maintain standards as it grows, but our assessment of the risk profile at 'bbb+' may be pressured if they are relaxed. The risk profile score is above the business profile score, reflecting the simple and relatively low risk nature of MYS's mortgage portfolio, which offsets some of the downside associated with a modest franchise.
Asset Quality to Deteriorate: We expect MYS's impaired loan/gross loan ratio to deteriorate in the financial year ending
Profitability Pressure: We expect the operating profit/risk-weighted asset (RWA) ratio to fall in FY24 from the 2% reported in FY23 as competition for both loans and deposits pressures the net interest margin (NIM), loan growth slows and impairment charges increase as asset quality weakens. Some of these headwinds should ease in FY25. Profitability metrics remain a strength of MYS's financial profile despite this expected weakening.
Some Wholesale Reliance: MYS's funding mix incorporates a greater use of wholesale funding than many Australian small bank peers that typically have a higher proportion of deposit funding, although liquidity appears to be managed well. We expect MYS's loan/customer deposit ratio to weaken modestly from the 126% reported at FYE23 as loan growth outpaces deposit growth.
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
IDRs and VRs
The group's IDRs and VRs could be downgraded if its risk profile were to increase, possibly through a loosening of underwriting standards or risk controls in the pursuit of growth, although we do not expect this to occur.
The group's ratings could also be downgraded if there is a sustained deterioration of the bank's financial metrics, possibly reflected in a combination of:
the four-year average of impaired loans/gross loans increasing to above 3% for a sustained period (FY20-FY23 average: 0.3%);
the four-year average of operating profit/RWA ratio declining below 0.75% for a sustained period (FY20-FY23 average: 2.0%); and
the CET1 ratio falling below 10% without a credible plan to increase it back above this level (FYE23: 11.2%).
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
IDRs and VRs
Positive rating action on MYS's and MSB's VRs and IDRs appears unlikely, as it would require a significant improvement in the financial profile and business profile without a substantial increase in the risk profile.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
Short-Term IDRs: The Short-Term IDRs are at the lower of the two options available at a Long-Term IDR of 'BBB+', as the funding and liquidity score of 'bbb' is not high enough to support the higher option.
Senior Unsecured Debt: MSB's senior unsecured ratings are equalised with the bank's IDRs at 'BBB+' and 'F2'. This is because there is no developed resolution regime with a realistic prospect of senior debt bail-in in
MYS's senior unsecured debt programme ratings are notched down once from its IDRs at 'BBB' and 'F3' as per Fitch's Bank Rating Criteria, which states that bank holding company senior unsecured ratings are rated using the principles for markets with developed resolution regimes. None of the reasons for equalising MYS's senior unsecured debt ratings with its IDRs is present. Both MYS and MSB can issue senior and subordinated debt under an AUD2 billion debt issuance programme, although in practice we expect only MSB will issue senior debt.
Subordinated Debt: MYS's subordinated Tier 2 debt is rated two notches below its anchor rating, the VR, which is consistent with the base case in Fitch's Bank Rating Criteria. This captures two notches for loss severity and zero notches for non-performance risk, with the latter already adequately reflected in the VR. None of the reasons for alternative notching, as described in the criteria, is present.
GSR: The GSR of 'no support' assigned to MYS and MSB reflect that there is no reasonable assumption authorities will provide support to the bank or group, given the small market share and low systemic importance.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Short-Term IDRs: A downgrade of the Short-Term IDRs to 'F3' may occur if the Long-Term IDRs were downgraded to 'BBB' or below.
Senior Unsecured Debt: The senior unsecured ratings of MSB will be downgraded if its IDRs are downgraded.
The long-term senior unsecured rating assigned to MYS's debt programme would be downgraded if MYS's Long-Term IDR were downgraded and bank holding company senior unsecured plus group junior debt buffers remained below 10% of group RWAs. The short-term senior unsecured rating assigned to MYS's debt programme would only be downgraded if the long-term senior unsecured debt programme rating were downgraded to 'BB+' or below.
Subordinated Debt: The ratings assigned to MYS's subordinated Tier 2 bonds will be downgraded if MYS's VR is downgraded.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Short-Term IDRs: The Short-Term IDRs could be upgraded to 'F1' if Fitch revised the funding and liquidity score to 'a', from 'bbb', or the Long-Term IDRs are upgraded to 'A', although both scenarios are unlikely.
Senior Unsecured Debt: The senior unsecured ratings of MSB and MYS will be upgraded if their respective IDRs are upgraded. MYS's senior unsecured programme ratings may also be upgraded if bank holding company senior debt plus group junior debt buffers increased to above 10% of group RWAs, although this appears unlikely in the short to medium term.
Subordinated Debt: The ratings assigned to MYS's subordinated Tier 2 bonds will be upgraded if MYS's VR is upgraded.
GSR
The GSR is at the lowest point on the scale and no negative action is possible. Positive action on the GSR would require a significant improvement in market position, such that its market share rises to around 1%. An upgrade of this rating is unlikely to affect the Long-Term IDR, which is driven by the group's standalone credit strength.
VR ADJUSTMENTS
The business profile score of 'bbb' has been assigned above the 'bb' category implied score for the following adjustment reason: business model (positive).
The asset quality score of 'a-' has been assigned below the 'aa' category implied score for the following adjustment reason: concentration (negative).
The capitalisation and leverage score of 'bbb+' has been assigned below the 'a' category implied score for the following adjustment reason: size of capital base (negative).
Sources of Information
The principal sources of information used in the analysis are described in the Applicable Criteria.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores
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