OREANDA-NEWS. Fitch Ratings-Sydney-08 April 2015: Fitch has affirmed Police Bank Ltd's (Police Bank) Long-Term Issuer Default Rating (IDR) of 'BBB+'. The Outlook is Stable. A full list of rating actions can be found at the end of this commentary.

KEY RATING DRIVERS - IDRs, VIABILITY RATING (VR) AND SENIOR DEBT

Police Bank's IDRs, VR and Stable Outlook reflect its solid capitalisation, funding and liquidity and stronger asset quality relative to its peers. The bank's limited franchise, small capital base and geographical asset concentration remain constraining factors to its rating.

Although the bank's capital ratios are strong relative to its peers, its absolute capital base is small and access to new capital is limited to retained profits due to its mutual ownership status. Fitch expects the capital ratio to remain at current levels in FY15 supported by a moderate level of earnings and profitability.

The bank's loan book is fully funded by customer deposits and utilisation of wholesale funding has remained stable at about 10% of total funding. Fitch expects the loan-to-deposit ratio to be maintained around 100% in FY15 and FY16 (FYE14: 97%) and positioned favourably against its peers.

Police Bank's modest franchise is focused on servicing its core customers, the New South Wales and Australian Federal Police Force. It operates a simple and transparent business model, primarily providing residential mortgages. The bank benefits from a loyal customer base however on a broader scale, accounts for less than 1% of Australian banking system assets which limits its pricing power.

The bank's asset quality is strong, with loan impairment levels remaining low over the last four years relative to its peer group. Fitch expects these levels to be maintained throughout FY15 and FY16 and is reflective of the bank's conservative risk appetite and focus on residential mortgages. The loan book also benefits from the core customer profile, police force employees who tend to have higher job security relative to other industries and are less impacted by economic cycles. Police Bank's exposure to loans with a lending value ratio above 80% has remained stable - the high usage of lenders mortgage insurance reduces the risk of loss.

RATING SENSITIVITIES - IDRs, VR AND SENIOR DEBT

Police Bank's IDR and VR are sensitive to changes in its funding and liquidity, capitalisation and company profile. A significant deterioration in the bank's funding, liquidity and/or capitalisation may lead to negative rating action. A significant improvement in the bank's franchise while maintaining existing credit strengths would be required for a positive rating change, which is considered unlikely in the short to medium term.

KEY RATING DRIVERS & SENSITIVITIES - SUPPORT RATING & SUPPORT RATING FLOOR

Police Bank's Support Rating of '5' and Support Rating Floor of 'No Floor' reflect Fitch's view that while support from authorities is possible, it cannot be relied upon. Support Ratings and Support Rating Floors are sensitive to any change in assumptions around the propensity or ability of the Australian sovereign to provide timely support to the bank.

The rating actions are as follows:

Police Bank Ltd:
Long-Term IDR affirmed at 'BBB+'; Outlook Stable;
Short-Term IDR affirmed at 'F2';
Viability Rating affirmed at 'bbb+';
Support Rating affirmed at '5';
Support Rating Floor affirmed at 'No Floor';
Long-term Senior Unsecured rating affirmed at 'BBB+; and'
Short-term Senior Unsecured rating affirmed at 'F2'