Fitch Ratings-Sydney-06 September 2010: Fitch Ratings has today upgraded the Support Rating for Southland Building Society (SBS Bank) to '4' from '5', and assigned a Support Rating Floor of 'B+'. At the same time, the agency affirmed all other ratings of SBS Bank, with a Stable Outlook on the Long-term Issuer Default Rating (IDR) of 'BBB'. A full list of rating actions is included at the end of this commentary.

The upgrade of SBS Bank's Support Rating reflects Fitch's view that the propensity for the New Zealand regulatory authorities to provide support is higher than Fitch originally considered likely when the ratings were first assigned. The Reserve Bank of New Zealand (RBNZ) assumed responsibility for the prudential supervision of SBS Bank in October 2008, at the time SBS Bank was granted bank registration by RBNZ. The Support Rating Floor assigned to SBS Bank at 'B+' indicates Fitch's view that support from the local authorities is likely to be provided at this rating level, meaning that, were the Long-term IDRs to be downgraded, they would not fall below the Support Rating Floor of 'B+'.

The affirmation of SBS Bank's Long-term and Short-term IDRs and Individual Rating reflect the bank's sound performance in a difficult operating environment, which was characterised by: fierce deposit competition amongst New Zealand's financial institutions; an increase in unemployment; a fall in property prices; and economic slow-down. Despite all these factors, SBS Bank generated healthy operating profitability, benefited from solid retail funding while developing alternative wholesale funding sources, and maintained its good asset quality, reflecting SBS Bank's robust risk management. From an international perspective, the ratings also consider SBS Bank's absolute small size, more significant lending concentration and tighter on-balance sheet liquidity.

Southland Building Society (SBS Bank):

Long-term IDR affirmed at 'BBB'; Outlook Stable;

Local Currency Long-term IDR affirmed at 'BBB'; Outlook Stable;

Short-term IDR affirmed at 'F2';

Local Currency Short-term IDR affirmed at 'F2';

Individual Rating affirmed at 'C'; Support rating upgraded to '4' from '5';

Support rating floor assigned at 'B+';

Senior unsecured debt affirmed at 'BBB+'; and

Subordinated notes affirmed at 'BBB-'.