For the first time ever, Australia’s largest credit union has been assigned an A3 credit issuer rating, reflecting its focus on low-risk residential mortgages and mutual ownership structure.
Moody’s Investor Service assigned CUA with long-term/short-term issuer ratings of A3/P-2, a baseline credit assessment of a3, and counterparty risk assessments of A2/P-1.
The credit rating agency said CUA’s ratings are supported by its mutual ownership structure that, due to the absence of shareholder expectations for returns, alleviates pressure to increase risk to maximise profits, especially at times when the operating environment is weak.
“This flexibility allows CUA to maintain its low-risk business model and strong underwriting standards over the economic cycle,” Moody’s said.
“These strengths are reflected in CUA’s robust asset quality – at FY2014, its non-performing loans (which include impaired and 90-day plus past-due loans) comprised 0.56 per cent of total loans and have steadily improved over the past three years.
“This compares favourably against the average of all authorised deposit-taking institutions in Australia of approximately 1.23 per cent."
Moody’s said CUA’s asset quality is supported by its focus on low-risk residential mortgages – which make up 95 per cent of total loans – and the geographic diversity of its loan portfolio.
“Whilst CUA’s exposure to its home state of Queensland makes up just under half of its loan book, this compares favourably to many of its mutual peers that are focused almost exclusively on just one state,” it said.
The credit union maintains healthy capital levels as reflected by a Common Equity Tier 1 ratio of 14.4 per cent (at March 2015), according to Moody’s.
“CUA’s capital position is further supported by its mutuality, which allows all profits to be retained as capital,” it said.
Moody’s said CUA must maintain sufficient profitability to organically build capital and survive as a going concern given that, as a mutual, it does not have the flexibility to raise additional common equity.
“Profitability continues to be pressured by ongoing challenges in the operating environment. Moderate system credit growth is sustaining price competition in the home loan market, while the low interest rate environment creates generally negative pressure on margins,” it said.
“However, given that CUA is a mutual and hence is not pressured to maximise returns, it may be better positioned to absorb these profitability pressures than its listed peers.
“Furthermore, CUA’s revenue sources are more diverse than its mutual peers as a result of its insurance operations: during 2014, CUA’s two insurance subsidiaries contributed 18 per cent of profits. Hence, CUA is less reliant on interest income than most of its mutual peers.”