OREANDA-NEWS. Fitch Ratings has assigned a Long-Term Issuer Default Rating (IDR) of 'B+' to New Zealand Baptist Savings & Development Society Incorporated (Baptist Savings). The Outlook is Stable. A full list of rating actions can be found at the end of this commentary.

KEY RATING DRIVERS - IDRs

Baptist Savings' Long-Term and Short-Term IDRs are constrained by its high risk appetite, low levels of capitalisation and modest earnings considering its risk profile. These factors are partly offset by the society's funding and liquidity strengths, niche market focus and stable asset quality.

Baptist Savings' risk appetite appears higher than other lending institutions' because there is a high concentration in church lending - an area that other financial institutions traditionally perceive to be of higher risk due to the potential for volatility in gift and donation income. Baptist Savings is also exposed to high borrower concentration with the 10 largest accounting for 43% of gross loans at the end of the financial year at 31 August 2014 (FYE14). Provisioning levels are low, leaving the capital base vulnerable to a downturn in asset quality. The higher risk appetite is partly mitigated by the low loan-to-value ratio (LVR) across the portfolio and the society's conservative approach to growth.

The society's capital position in absolute terms is small and its capital ratios are weak relative to other similar-sized New Zealand-based non-bank deposit taking (NBDT) institutions. Outside of internal capital generation, there are limited sources of new capital, which limits Baptist Savings' financial flexibility. The acquisition of Presbyterian Savings & Development Society (PSDS) is likely to result in a modest improvement in the ratios, although they will remain below that of other NBDT institutions.

Fitch expects operating profitability to improve in FY15 following the acquisition of PSDS and increase in Baptist Savings' scale. However, the earnings uplift is likely to be partly offset by increasing regulatory and compliance costs. Profitability levels are low relative to Baptist Savings' risk profile and limit its capacity to absorb potential losses from any asset quality downturns - this is a function of the society's focus as a charitable lending organisations. The increase in Baptist Savings' cost-to-income ratio will stabilise with the increase in scale, but could climb again if revenue growth does not outpace the rising regulatory and compliance costs.

Baptist Savings' loans are fully funded by a combination of church and household deposits. There is some level of depositor concentration. The largest depositors tend to be churches or church-related bodies that have the same strategic goals as Baptist Savings. Household deposits account for 50% of the deposit base and tend not to be wholly motivated by investment returns. The reinvestment rates are typically high at around 90% leading to a stable deposit base. On-balance sheet liquidity is adequate reflected in a loan-to-deposit ratio of 55.8% at FYE14. However, Baptist Savings has no access to the repo-facilities of the Reserve Bank of New Zealand.

Baptist Savings is a small financial institution with a simple and transparent business model. It focuses on providing loans to church and church-related entities to further the interests of the Christian community. Baptist Savings has a small franchise with a limited customer base, although it benefits from community support. Pricing power is moderate due to the niche market segment.

Loan impairments and default have historically been very low and are likely to remain at similar levels in FY15, reflecting Baptist Savings' business model and work-out framework. The strong ratios are not reflective of the credit and concentration risk of Baptist Savings. In cases of hardship, loans are typically restructured to reduce the financial burden and repayment amount for the borrower. Notwithstanding this, the amount of interest income written off over FY11-FY14 has been low at NZD300,000 indicating the solid performance of the loan book.

RATING SENSITIVITIES - IDRs

Baptist Savings' IDRs are sensitive to developments in New Zealand's Christian community. If economic or social conditions were to materially weaken, leading to a sustained level of lower gift and donation income and/or a reduction in congregation numbers, Baptist Savings' ratings would face downward pressure. There would also be negative pressure on the ratings if the member churches and depositors lost confidence in the society, capital levels declined and concentration risks increased.

A significant improvement in Baptist Savings' risk appetite, risk controls and capital levels would be required for a positive rating change, which is considered unlikely in the short to medium term.

The rating actions are as follows:

New Zealand Baptist Savings & Development Society Incorporated:

Long-Term Foreign Currency IDR assigned at 'B+'; Outlook Stable
Short-Term Foreign Currency IDR assigned at 'B'