Mutuals rattled amid S&P ratings clutter
Around a dozen mutual banks or credit unions, including one ASX listed bank, find their debt securities ineligible for use in repurchase operations with the Reserve Bank of Australia as of yesterday, thanks to an S&P Global Ratings downgrade that yanked the credit ratings of this group one notch lower.Quick punditry by sell-side analysts on the debt side settled on the smaller, and mostly mutual ADIs as the sub-set of Australian banks whose cost of funds in institutional markets may be most affected by the ratings jolt.The baker's dozen of ADIs had their long term rating cut from BBB+ to BBB, stripping each bank's debt with a term of 12 months of an essential criteria for use in repos with the RBA. This will force a rethink at each mutual bank on their liquidity management practices.This list includes the largest mutual names such as Teachers Mutual Bank, Police Bank, People's Choice Credit Union, Newcastle Permanent Building Society, IMB, Greater Bank, Defence Bank, Credit Union Australia, Beyond Bank and Bank Australia. The unlisted ME, or Members Equity Bank, is in the same boat as this group. MyState Bank is the ASX listed ADI in the same boat with a peer group that, like it, share credit union origins.Three more mutual banks, and still one more ASX listed ADI, are on the cusp of falling out of the BBB tier of issuer credit rating, the next step down (for any reason) into the double B range deemed as outside investment grade in many investment mandates.They are: QBank, Qudos Mutual, G&C Mutual Bank and Auswide Bank, the latter with a listing.Matthew Howard, a debt market analyst with Commonwealth Securities, wrote in a briefing of his "initial thoughts that the movements in spreads for the now non-repo eligible BBB names will be ten to 20 basis points wider."Howard estimated the impact on funding costs for Bendigo and Adelaide Bank and Bank of Queensland at around five bps to ten bps, while the larger bank names exempted from the cut would dodge any rise in funding costs."We expect a greater tiering [in spreads on bank debt] between the majors relative to Bendigo and BOQ and the BBB names," Howard said. Mike Currie, chief executive of QBank (the former Queensland Police Credit Union) said of the bank's new rating of BBB- :"It's disappointing from our perspective. We'll work a little bit harder on funding."Asked to estimate the likely lift in QBank's cost of funds, Currie said "it's pretty hard to put a number on. We're very comfortable with the state of the business."Martin Barrett, managing director at another Queensland-based ADI, Auswide Bank, agreed the cut in the bank's rating to BBB- "won't make life any easier from a funding cost perspective."He added that Auswide "has the strongest capital position of any listed ADI in Australia, 14.6 per cent at December 2016."One response, Barrett said was "to look to something strategic in scale," as Auswide has done in the past (taking over Your Credit Union in 2016)