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Bank of Queensland Limited -- Moody's affirms BOQ's ratings, outlook stable

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Rating Action: Moody's affirms BOQ's ratings, outlook stableGlobal Credit Research - 22 Feb 2021Sydney, February 22, 2021 -- Moody's Investors Service, ("Moody's") today affirmed the A3 long-term issuer and senior unsecured debt ratings of Bank of Queensland Limited ("BOQ"). Moody's has also affirmed BOQ's baseline credit assessment (BCA) and adjusted BCA of baa1. The rating outlooks remains stable. This follows from BOQ's announcement that it has agreed to acquire Members Equity Bank Limited (Baa1/Baa1 negative, baa1) for AUD 1.325 billion."IMPORTANT NOTICE: MOODY'S RATINGS AND PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS. SUCH USE WOULD BE RECKLESS AND INAPPROPRIATE. SEE FULL DISCLAIMERS BELOW."Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL440869 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.RATINGS RATIONALEThe affirmation of BOQ's A3 long-term issuer and senior unsecured ratings reflects the benefits of the transaction to BOQ's asset risk profile, the expected equity raising to fund the transaction purchase, which will enable BOQ to maintain its robust capitalization, and the potential benefits to the group's profitability from scale and cost synergies.Moody's expects BOQ's asset risk profile will improve following the acquisition as it will further diversify BOQ's geographic footprint, whilst at the same time increasing its exposure to residential mortgages, which tend to exhibit lower loss characteristics than SME lending. However, Moody's expects that BOQ's problem loans will increase, from 1.29% (as at 31 August 2020), as government fiscal stimulus measures and banking relief packages expire in 2021. This is likely to lead to some borrowers, who currently benefit from loan deferrals, becoming delinquent on their loans.The proposed equity raising will enable BOQ to maintain high levels of capital supporting the group's credit profile. BOQ's Common Equity Tier 1 ratio is expected to be above 10% at the end of first-half fiscal year 2021, excluding the impacts of the capital raising. Moody's expects the consolidated group would continue to maintain robust capitalization, in line with BOQ's stated target operating range for Common Equity Tier 1 capital of between 9% and 9.5%.Despite these strengths, in Moody's opinion, the consolidated group would have a weaker funding profile given Members Equity Bank Limited's higher use of wholesale market funding, particularly secured funding in the form of residential mortgage backed securities. Nonetheless Moody's expects that, over time, the consolidated group's funding profile will rebalance more towards BOQ's current funding mix.Moody's continues to incorporate a moderate likelihood of support from the Australian Government (Aaa stable) due to BOQ's moderate systemic importance, which will be consolidated by its increase in scale, and which leads to a one-notch uplift to BOQ's long-term issuer and senior unsecured debt ratings from the bank's baa1 BCA.OUTLOOKThe stable outlook reflects Moody's view that, whilst the economic disruption stemming from the COVID-19 pandemic will continue to weigh on the asset quality outlook, ultimate credit losses will likely be manageable and within tolerance levels for the bank's rating.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSWHAT COULD CHANGE THE RATINGS UPThe bank's ratings could be upgraded if; (1) problem loans ratio (measured as impaired loans + loans more than 90 days past due as a % of gross loans and advances) falls to below 0.75%, (2) Moody's capital ratio (measured as tangible common equity as a % of RWA) increases to above 12%, or (3) the level of wholesale funding decreases such that market funds as a % of tangible banking assets falls to below 20%.WHAT COULD CHANGE THE RATINGS DOWNThe bank's ratings could be downgraded if; (1) problem loans ratio (measured as impaired loans + loans more than 90 days past due as a % of gross loans and advances) increases to above 3%, (2) Moody's capital ratio (measured as tangible common equity as a % of RWA) falls below 8%, or (3) The level of wholesale funding increases such that market funds as a % of tangible banking assets rises to above 32%.The principal methodology used in these ratings was Banks Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147865. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Bank of Queensland Limited, headquartered in Brisbane, Queensland, had total assets of AUD 56.8 billion (USD42 billion) at the end of August 2020.REGULATORY DISCLOSURESThe List of Affected Credit Ratings announced here are all solicited credit ratings. Additionally, the List of Affected Credit Ratings includes additional disclosures that vary with regard to some of the ratings. Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL440869 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and provides, for each of the credit ratings covered, Moody's disclosures on the following items:** Rating Solicitation** Issuer Participation** Participation: Access to Management** Participation: Access to Internal Documents ** Disclosure to Rated Entity ** Endorsement ** Lead Analyst ** Releasing Office For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Francesco Mirenzi VP - Senior Credit Officer Financial Institutions Group Moody's Investors Service Pty. Ltd. Level 10 1 O'Connell Street Sydney NSW 2000 Australia JOURNALISTS: 61 2 9270 8141 Client Service: 852 3551 3077 Patrick Winsbury Associate Managing Director Financial Institutions Group JOURNALISTS: 61 2 9270 8141 Client Service: 852 3551 3077 Releasing Office: Moody's Investors Service Pty. Ltd. Level 10 1 O'Connell Street Sydney NSW 2000 Australia JOURNALISTS: 61 2 9270 8141 Client Service: 852 3551 3077 © 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. 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