OREANDA-NEWS. Fitch Ratings has today, affirmed the Long-Term Issuer Default Ratings (IDR) of five Australia-based regional financial institutions as follows:

- Suncorp-Metway Limited (SML) at 'A+',
- Bendigo and Adelaide Bank Limited (BEN) at 'A-',
- Bank of Queensland Limited (BOQ) at 'A-',
- Police Bank Ltd (PBL) at 'BBB+', and
- Heritage Bank Limited (HBL) at 'BBB+'.

All have Stable Outlooks. At the same time, Fitch has affirmed the Short-Term IDRs, Viability Ratings (VR), Support Ratings (SR) and Support Rating Floors (SRF) of the above banks. A full list of rating actions is at the end of this commentary.

The affirmation of the IDRs, VRs and senior debt ratings reflects our view that all five entities are likely to continue to perform solidly over the next 12 to 24 months. However, the current operating environment emphasises the importance of the Australian regional banks' risk appetites.

Fitch believes that the banks are unlikely to significantly increase their franchises without compromising their risk appetite. This would be compounded by the turning credit cycle, increasing the downside risk to asset quality. However, Fitch expects that the regional banks will likely maintain their conservative risk appetites, which is partly reflected in a greater weighting of mortgages within their loan books. As a group, the banks' risk controls have continued to improve through investments in technology and risk management systems. Tighter underwriting criteria and a low interest rate environment have contributed to the banks' sound asset quality, which is reflected in strong impaired loan ratios relative to international peers.

The five banks have transparent business models, focusing on residential mortgages. SML, BEN and BOQ have some exposures to commercial lending, but these are generally well-collateralised with modest levels of concentration. In Fitch's view, all the Australian regional banks have relatively small national franchises and are price-takers, although some benefit from a level of community support in their home markets. BEN and BOQ have continued to diversify their business models through acquisitions in recent years. SML's franchise benefits from being part of the wider Suncorp Group Limited (SGL, A+/Stable), a large insurance company, through common branding, cross-sale opportunities and back office support.

Fitch expects the funding and liquidity profiles of the banks to remain stable in 2016, with retail deposits to remain the main source of funding. PBL's loan book is fully deposit funded, however the other banks' reliance on wholesale funding remains a weakness relative to international peers. Further improvements in funding structures are likely to come from longer-term wholesale issuances rather than increased deposits due to the structural deficit of deposits in Australia. Liquidity management has improved for SML, BEN and BOQ as a result of reporting requirements under the Liquidity Coverage Ratio (LCR) regime. HBL and PBL aim to manage their liquidity similar to the LCR framework even though they are not required to adhere to the regime.

The banks are adequately capitalised, although they trail international peers on risk weighted and un-risk weighted ratios. BOQ and BEN are listed and have greater access to capital markets whereas the mutual structure of PBL and HBL limits their source of fresh common equity to retained earnings. SML's parent, SGL is listed and in Fitch's view there is a high degree of capital fungibility within the group.

Fitch expects Australia's operating environment to remain stable in 2016, with GDP growth of 2.9%. Household debt remains high relative to global peers, leaving borrowers more susceptible to rising unemployment and sharp increases in interest rates, which are at historic lows. Unemployment is likely to remain elevated for some time, which may place some pressure on Australian bank asset quality; however, Fitch believes this is likely to be moderate and manageable by the banks.

KEY RATING DRIVERS

IDRS, VR, SENIOR DEBT, SUPPORT RATING, SUPPORT RATING FLOOR
Suncorp-Metway Limited
SML's Long-Term IDR is aligned with that of SGL, reflecting the extremely high likelihood of support from its parent should it be required. In Fitch's view, SML remains a core subsidiary of SGL and we believe there is a high level of capital fungibility within the group.

SML's VR reflects the bank's stabilising performance and asset quality under the current strategic direction and more conservative risk appetite since it exited its legacy non-core exposures in 2013. The VR also considers SML's modest franchise and its funding composition.

Cost efficiency has been a key focus for the bank and its FYE15 cost-to-income ratio at 53% is now one of the strongest within the domestic peer group. Fitch believes a further improvement towards a 50% cost-to-income ratio is possible within the next two years, assisted by technology and systems investment.

SML's asset-quality ratios also compare favourably to most domestic and international peers, reflecting tighter underwriting criteria and a more conservative approach to growth since 2013 that focuses mainly on lower-risk residential mortgages and reducing its exposure to larger commercial loans.

SML's Support Rating of '1' reflects the extremely high likelihood of support from SGL should it be required. Fitch views SML as a core subsidiary of SGL, and believes the group has the ability and propensity to provide support if needed.

SML's Support Rating Floor of 'BB+' reflects a moderate potential for government support. SML's SRF is one notch higher than BEN's and BOQ's to reflect that it is part of larger financial group that plays a key role in the Australian market.

KEY RATING DRIVERS

IDRS, VR, SENIOR DEBT
Bendigo and Adelaide Bank Limited
BEN's IDRs, VR and senior debt ratings reflect the bank's conservative risk appetite, good asset quality, consistent profitability and strengthened capitalisation. The ratings also consider BEN's moderate franchise in a highly concentrated and competitive market, as well as its weaker funding position relative to international peers.

Fitch expects BEN's risk appetite to remain stable, benefiting from risk control improvements and tight underwriting standards, which should support the bank's asset-quality performance through the economic cycle. BEN is mainly exposed to residential mortgages. Business loans are mostly secured on commercial property and land, with a small portion of the business exposure secured with the business owners' residential property. Asset growth is likely to continue to be driven by organic growth and opportunistic acquisitions, which Fitch expects to be within BEN's risk appetite settings.

BEN's funding position benefits from a larger proportion of household deposits relative to domestic peers, although the proportion lags those of its international peers. Wholesale funding adds diversity and the lengthened maturity profile supports the bank's liquidity management. Fitch expects BEN's capital to remain adequate as it benefits from solid retained earnings. Regulatory risk-weighted ratios are likely to improve in the medium term once BEN becomes a bank accredited to use the internal ratings-based (IRB) approach to credit risk.

Bank of Queensland Limited
BOQ's IDRs, VR and senior debt rating reflect the bank's improved risk appetite and risk controls, which should support good asset-quality performance. The ratings also consider BOQ's moderate franchise and clear corporate strategy in a highly competitive and concentrated market, its improved asset quality and earnings, as well as its adequate capitalisation and greater reliance on wholesale funding markets than domestic peers.

BOQ's risk appetite has significantly strengthened since late-2011, although a further reduction in concentration risks appears unlikely. Underwriting standards remain tight and risk controls continue to improve. Recent strong asset growth reflects the acquisition of BOQ Specialist (Aust) Limited (BOQS), which has not weakened BOQ's risk profile. BOQS has helped BOQ's company profile, strengthening its franchise with smaller businesses, especially in the medical industry. The medical industry is well-regulated, which results in typically low delinquency rates. The acquisition provided BOQ with additional wealthy customers that were the bank's mortgage growth driver in the financial year ended 31 August 2015.

Capitalisation and funding remain BOQ's weaknesses relative to international peers. BOQ uses wholesale funding instruments to a greater degree than its international and most domestic peers. However, these instruments provide investor diversification and have lengthened the bank's maturity profile and support BOQ's liquidity position. BOQ's reliance on offshore wholesale funding has remained small. Fitch expects capitalisation to benefit from strong levels of retained earnings helped by a more flexible dividend policy.

BOQ Specialist (Aust) Limited
BOQS's IDRs and Support Rating have been affirmed and withdrawn, reflecting the reorganisation since its acquisition by BOQ. BOQS's originally outstanding debt has been transferred to BOQ. BOQS is therefore no longer relevant to Fitch's coverage.

Heritage Bank Limited
HBL's IDRs, VR and senior debt rating reflect its conservative risk appetite and approach to growth which has supported its stronger asset-quality ratios relative to domestic and international peers. At the same time, consideration has also been given to HBL's small franchise, adequate capital, and weaker funding profile relative to international peers.

HBL's conservative risk appetite offsets its less-sophisticated risk management systems compared with larger peers. The bank's loan portfolio is almost entirely made up of residential mortgages. The residential mortgage composition also appears more conservative than its peers with a higher weighting towards owner-occupied properties, and principal and interest loans, which Fitch considers less risky.

Fitch considers HBL's capital adequate for its size. Its risk-weighted ratios remained among the highest within Fitch-rated Australian banks. However, its un-risk weighted ratios lagged its peers. HBL also has limited access to new common equity capital owing to its mutual ownership structure, although the absence of dividend payments means that its internal capital generation is higher than that of its peers.

Police Bank Limited
PBL's IDRs and VR reflect its conservative risk appetite, strong asset quality, robust capitalisation and wholly deposit-funded loan book. Off-setting some of these considerations are its small franchise, concentration risk and low earnings growth.

PBL's franchise is focused on serving its core members, who are part of the New South Wales and Australian Federal Police Force. The bank operates a simple business model, primarily providing residential mortgages. The focus on a niche target market limits the bank's earnings and growth opportunities as it does not actively market to non-core customers.

The bank's asset quality is one of the strongest within its peer group, and it is supported by its conservative underwriting criteria, focusing mainly on owner-occupier mortgages. PBL has a higher proportion of personal lending than its peers, although this risk is partially mitigated by the profile of its core borrowers - mostly public-service employees who tend to have higher employment security relative to other industries.

PBL has the most robust capitalisation ratios within its domestic peer group, however Fitch views its capital buffers as appropriate as its absolute capital base is small and access to new capital is limited as a result of its mutual ownership structure. PBL's loan book is also concentrated to the Sydney property market, where prices have increased sharply over the last 18 months.

SUPPORT RATING AND SUPPORT RATING FLOOR
Bendigo and Adelaide Bank Limited, Bank of Queensland Limited
BEN and BOQ's Support Rating of '3' and Support Rating Floor of 'BB' reflect the moderate potential of government support should it be needed given their modest market shares and role in the banking system.

Heritage Bank Limited, Police Bank Limited
HBL and PBL's Support Rating of '5' and Support Rating Floor of 'No Floor' reflect Fitch's view that while support from the authorities is possible, it cannot be relied upon as the banks' market shares and significance to the banking system is minimal.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Subordinated debt issued by BEN, BOQ and HBL is rated according to Fitch's rating criteria. The ratings of the banks' subordinated debt are notched one level down from the anchor ratings, the VRs, for loss severity, and no notching has been applied for non-performance risk.

RATING SENSITIVITIES

IDRS AND SENIOR DEBT
Suncorp-Metway Limited (SML)
SML's IDR would be sensitive to any change in the ability or propensity of SGL to provide support. A change in SGL's IDR would likely trigger a similar action for SML.

Bendigo and Adelaide Bank Limited (BEN), Bank of Queensland Limited (BOQ), Heritage Bank Limited (HBL), Police Bank Limited (PBL)
The IDRs and senior debt ratings of the four other entities are driven by their VRs.

VR
Suncorp-Metway Limited, Bendigo and Adelaide Bank Limited, Bank of Queensland Limited, Heritage Bank Limited, Police Bank Limited
The VRs could come under pressure should the banks compromise their risk appetite, most likely in the form of weaker underwriting standards, looser risk controls and more aggressive loan growth in order to increase their company profiles. A severe deterioration in asset quality could result in weaker operating profitability and capitalisation, and trigger negative rating action.

Positive rating actions are unlikely given the entities' modest market shares in their key markets, although SML's franchise is less of a constraint to its ratings relative to the other regional banks. Weaker funding and liquidity profiles relative to international peers and increasing pressure on earnings growth in a low credit growth and interest rate environment are also limiting factors.

SUPPORT RATING AND SUPPORT RATING FLOOR
SML's Support Rating would be sensitive to changes in the assumptions around the ability and propensity of the parent, SGL to provide timely support in need. A significant reduction in SGL's ability to support SML, as measured by capital surplus to minimum targets, without a commensurate improvement in SML's standalone credit profile (measured by the VR) could place downward pressure on ratings. The Support Rating would also be reviewed if Fitch no longer considered SML to be a core member of SGL.

SML's Support Rating Floor and the Support Ratings and Support Rating Floors of BEN, BOQ, HBL and PBL are sensitive to any change in assumptions around the propensity or ability of the Australian sovereign to provide timely support.

No change to the propensity of the authorities to provide support appears imminent despite global moves, although we expect Australia's resolution framework to be strengthened in the medium term. This would result in the removal of any assumption of sovereign support. Negative action on the Support Ratings and Support Rating Floors of the Australian regional banks will not have a direct impact on their IDRs, which are currently driven by their VRs (BEN, BOQ, HBL and PBL) or institutional support (SML).

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The subordinated debt ratings are broadly sensitive to the same considerations that might affect the issuers' relevant anchor ratings, the VR for BEN, BOQ, and HBL.

The rating actions are as follows:

Suncorp-Metway Limited (SML):
Long-Term IDR: affirmed at 'A+'; Outlook Stable;
Short-Term IDR: affirmed at 'F1';
Viability Rating: affirmed at 'a-';
Support Rating: affirmed at '1';
Support Rating Floor: affirmed at 'BB+';
Senior unsecured debt: affirmed at 'A+'/'F1'; and
Commercial paper: affirmed at 'F1'.

Bendigo and Adelaide Bank Limited (BEN):
Long-Term IDR: affirmed at 'A-'; Outlook Stable;
Short-Term IDR: affirmed at 'F2';
Viability Rating: affirmed at 'a-';
Support Rating: affirmed at '3';
Support Rating Floor: affirmed at 'BB';
Commercial Paper: affirmed at 'F2';
Senior unsecured debt affirmed at 'A-'/'F2'; and
Subordinated debt affirmed at 'BBB+'.

Bank of Queensland Limited (BOQ):
Long-Term IDR: affirmed at 'A-'; Outlook Stable;
Short-Term IDR: affirmed at 'F2';
Viability Rating affirmed at 'a-';
Support Rating: affirmed at '3';
Support Rating Floor: affirmed at 'BB';
Senior unsecured debt: affirmed at 'A-'; and
Subordinated debt affirmed at 'BBB+'.

BOQ Specialist (Aust) Limited (BOQS):
Long-Term IDR affirmed at 'A-'; Outlook Stable; Rating Withdrawn
Short-Term IDR: affirmed at 'F2'; Rating Withdrawn
Support Rating: affirmed at '1'; Rating Withdrawn

Heritage Bank Limited (HBL):
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';
Senior unsecured debt: affirmed at 'BBB+/F2'; and
Subordinated debt: affirmed at BBB.

Police Bank Ltd (PBL):
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'; and
Senior unsecured debt: affirmed at 'BBB+'/'F2'.