Moody’s affirms ratings of NPBS, revises outlook to stable from negative

Sydney, March 10, 2011 — Moody’s Investors Service has revised the rating
outlook for Newcastle Permanent Building Society (“NPBS”) to stable from
negative. NPBS’s ratings were affirmed at A2/P-1 for long-term and
short-term senior unsecured and C+ for its bank financial strength rating
(BFSR).

“NPBS’s stable outlook reflects the strength of the society’s financial
profile, which has remained resilient throughout the crisis”, said Daniel
Yu, an Analyst with Moody’s Sydney office. “It also reflects the
society’s strong franchise and steady growth within the Newcastle and
Hunter regions”, adds Yu.

NPBS’s financial strength is underpinned by its very high levels of
capitalization which provide a significant buffer to absorb losses in a
downturn. Capital levels have continued to grow strongly over the past
three years, despite reduced profitability in 2008 and 2009. As it is not
listed, NPBS does not pay dividends, allowing all profits to be retained
as capital. At December 2010 the society’s Tier 1 ratio stood at 18.79%,
which is the highest it has been in seven years.

Asset quality has held up well during the crisis and continues to be a
key strength for the society. NPBS adopts prudent lending practices and
maintains a conservative loan portfolio, which is focused on prime
residential mortgages. In 2010, non-performing loans (defined as impaired
loans plus 90 day past due loans) as a proportion of total loans were at
their lowest levels in five years at 0.18%.

The society’s conservative strategy extends to its funding approach which
is focused on retail deposits, which account for 77% of total funding.
NPBS maintains a sizable portfolio of transaction accounts, which make up
almost half of total retail deposits and are likely to be relatively
“sticky”, when compared to term deposits, which tend to be more price
sensitive. The remaining 23% of NPBS’s funding is comprised of
securitization, issued debt and corporate deposits. The society has taken
steps to improve its liquidity management by establishing an Exchange
Settlement Account, which will allow NPBS to easily repo its liquid
assets with the Reserve Bank of Australia (“RBA”) in case of need.
Furthermore, this will allow NPBS’s issued Certificate of Deposits to be
repo eligible with the RBA, which enhances their attractiveness to
investors.

Profitability recovered strongly in 2010, after a drop in 2008 and 2009,
which were impacted by a number of one-off items. Pre-provision profits
as a percentage of risk weighted assets reached their highest point in
five years at 2.45% in 2010.

We note that society’s franchise is concentrated within regional NSW with
almost 65% of loans sourced from the Hunter region. Whilst the Hunter
region is a diverse economy, NPBS’s concentration does mean that its
rating is particularly sensitive to the performance of this part of the
state. Furthermore, we would expect any future upward potential on the
rating to be limited, whilst the society maintains this geographic
concentration.

The current competitive environment does present a number of challenges
for the entire sector. Notably, profit has been pressured by higher
funding costs and competition for deposit funding. As a mutual, NPBS is
not under pressure to produce returns for shareholders which allows the
society to retain its low risk strategy and consolidate its position
during times of stress. As a result, we would expect NPBS to maintain its
credit profile in line with the assigned rating even in the current
challenging environment.

Nevertheless, a combination of the following is likely to trigger a
review of the rating:

(i) Tier 1 capital ratio falling below 12%

(ii) The total of impaired loans plus 90 day past due loans rising above
0.8% of gross loans

(iii) Wholesale funding minus liquid assets to total assets ratio being
greater than 10% or wholesale funding excluding securitization minus
liquid assets to total assets being greater than 0%

Please see the ratings disclosure page on our website www.moodys.com for
further information

The principal methodologies used in rating NPBS were “Bank Financial
Strength Ratings: Global Methodology” published in February 2007 and
“Incorporation of Joint-Default Analysis into Moody’s Bank Rating
Methodology” published in March 2007.

NPBS is headquartered in Newcastle, NSW, Australia. It reported assets of
AUD6.8billion (approximately USD5.8billion) as at 30 June 2010.

Sydney
Daniel Yu
Analyst
Financial Institutions Group
Moody’s Investors Service Pty. Ltd.
JOURNALISTS: (612) 9270-8102
SUBSCRIBERS: (612) 9270-8100

Sydney
Patrick Winsbury
Senior Vice President
Financial Institutions Group
Moody’s Investors Service Pty. Ltd.
JOURNALISTS: (612) 9270-8102
SUBSCRIBERS: (612) 9270-8100

Moody’s Investors Service Pty. Ltd.
Level 10
1 O’Connell Street
Sydney NSW 2000
Australia
JOURNALISTS: (612) 9270-8102
SUBSCRIBERS: (612) 9270-8100