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 of MYS and 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 and 93% of group operating profit in the financial year ended
The Long-Term IDRs are driven by the group VR, which is in line with the implied VR, and reflects profitability metrics higher than peers as well as strong, stable asset quality. These are offset by the group's small market position and a funding mix that lags peers, which tend to have larger deposit-funding bases. The Short-Term IDR of 'F2' is the lower of the two options available at a Long-Term IDR of 'BBB+', as the funding and liquidity score is not high enough to support the higher option; the threshold is a score of at least 'a'.
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 around 100%, well below the 120% threshold in Fitch's Bank Rating Criteria.
Slowing GDP Growth: The operating environment for Australian banks should remain stable and consistent with the 'aa-' factor score despite our expectation for slowing GDP growth in 2023 and softening house prices as a result of a sharp rise in interest rates throughout 2022 to tackle high inflation. Fitch believes that low unemployment, combined with conservative loan underwriting, should limit losses for the banks.
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
High Growth Targets: MYS has sound underwriting standards, with a focus on low-risk residential mortgages but has aggressive loan growth aspirations. This could put pressure on our assessment of the risk profile at 'bbb+' if it is achieved by relaxing underwriting standards, although we think this is unlikely in an environment with weakening economic conditions. 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.
Weaker Asset Quality: We expect higher interest rates to slow economic growth and result in a modest increase in unemployment, translating into weaker asset quality for Australian banks, including MYS. We expect this to be manageable and have maintained the asset quality score at 'a-'. This is lower than the implied 'aa' category score to reflect geographic and product concentrations in the loan portfolio.
Margin, Growth Support Profitability: Profitability metrics remain a strength of MYS's financial profile. We expect the operating profit/risk-weighted asset (RWA) ratio to increase to back above 2% in FY23 and FY24 on a higher net interest margin (NIM) and continued strong loan growth. The metric fell to 1.6% in FY22 on NIM attrition in a competitive environment and higher marketing costs associated with the bank's expansion in
The factor score of 'bbb+' is lower than the implied 'a' category score to reflect risks stemming from the small absolute size of the bank's capital base (total equity was AUD430 million or
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. We expect MYS's loan/customer deposits ratio to weaken modestly from the 124% reported at FYE22 as loan growth outpaces deposit growth. The funding factor score of 'bbb' is in line with the implied 'bbb' category score.
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
IDRS AND VR
The group's IDRs and VR 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:
impaired loans/gross loans increasing to above 3% for a sustained period;
the operating profit/RWA ratio declining below 1.5% for a sustained period; and
the CET1 ratio falling below 10% without a credible plan to increase it back above this level.
A downgrade of the Short-Term IDR to 'F3' would occur if the Long-Term IDR was downgraded to 'BBB' or below.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
IDRS AND VR
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.
While not probable, the Short-Term IDR could be upgraded to 'F1' if Fitch revised the funding and liquidity score to 'a', from 'bbb'.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
Senior Unsecured: 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 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 resolutions 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: 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:
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:
SENIOR UNSECURED DEBT
The senior unsecured ratings of MSB and MYS will be upgraded their respective IDRs are upgraded. MYS's senior unsecured programme ratings may also be upgraded if bank holding company senior unsecured 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 its 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).
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
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
Unless otherwise disclosed in this section, the highest level of environmental, social and governance (ESG) credit relevance is a score of '3'. 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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