Fitch Ratings has affirmed Nelson Building Society's sub-investment grade BB credit rating, saying that although further asset quality deterioration was possible, "a disciplined approach to lending and the use of lenders mortgage insurance for higher risk mortgages should provide a reasonable buffer against material credit losses in the event of foreclosure."

Here is the release from Fitch:

Fitch Ratings has today affirmed New Zealand's Nelson Building Society's (NBS) Long-term foreign currency Issuer Default Rating (IDR) at 'BB', Short-term foreign currency IDR at 'B', Individual at 'C/D', Support Rating at '5' and Support Rating Floor at 'NF'. At the same time, the agency has assigned NBS a Long-term local currency IDR of 'BB' and a Short-term local currency IDR of 'B'. The Outlook is Stable.

NBS's ratings reflect its modest position in New Zealand's overall financial system, while recognising its conservative approach to lending, strong liquidity and adequate capitalisation.

NBS lends primarily for residential mortgages and to SMEs in the Nelson region and although impaired loans represented a relatively high 0.74% of gross loans at FYE09, this increase came off a very low base and was due to one loan impairment (NZD1.4m). Although further asset quality deterioration is possible, a disciplined approach to lending and the use of lenders mortgage insurance for higher-risk mortgages should provide a reasonable buffer against material credit losses in the event of foreclosure.

NBS reported solid operating profit of NZD1.1m in the financial year ended 31 March 2009 (FYE09). The result was underpinned by a relatively high net interest margin of 2.56% and stable operating expenses. Like most other New Zealand financial institutions, asset quality deterioration is expected to be a key factor affecting NBS's performance in FY10. Although New Zealand's building societies appear to have navigated the adverse affects of the domestic recession and the global financial crisis reasonably well, the prospect of a full scale domestic economic recovery appears to be largely dependent on improved demand for exports by major trading partners, which may take some time.

The vast majority of NBS's funding is derived from retail sources, and despite strong competition reinvestment rates remained relatively high during FY09. The 'mutual' structure of building societies and a level of associated customer loyalty have provided most building societies with a historically stable funding base. Nevertheless, NBS's liquid assets and undrawn, committed bank funding lines represented more than 20% of total assets, and the equity/assets ratio of 6.95% equated to an estimated Tier 1 ratio of more than 9% at FYE09.

NBS is regulated by the Reserve Bank of New Zealand and will be required to meet several new regulatory and prudential standards for non-bank deposit-taking institutions over the next 12 months. Trustees will be responsible for ensuring that institutions comply with these requirements, which include policies that relate to minimum capital ratios, governance standards and risk management systems.

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Nelson Building Society

NBS was established in Nelson in 1862 to provide housing and personal finance to customers in the Nelson and Tasman regions on the South Island. NBS's products and services are distributed via a network of six branches.