Fitch Affirms Ratings of Major New Zealand Banks

Thu Mar 6, 2014 7:41pm EST

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(The following statement was released by the rating agency) SYDNEY, March 06 (Fitch) Fitch Ratings has affirmed the ratings of New Zealand's four major banks (the Majors): ANZ Bank New Zealand Limited (ANZNZ), ASB Bank Limited (ASB), Bank of New Zealand (BNZ), and Westpac New Zealand Limited (WNZL). A full list of rating actions is provided below. The ratings of the covered bonds issued by these banks are not affected. KEY RATING DRIVERS - IDRs, Support Ratings and Senior Debt The rating drivers and sensitivities of ANZNZ, ASB, BNZ and WNZL are similar due to the four banks' comparable characteristics. The affirmation of the New Zealand Majors' IDRs and Support Ratings reflect Fitch's view of an extremely high likelihood of support from their parent banks, should it be required. This is based on the banks' roles as core subsidiaries of their respective Australian parents. The Outlooks on the Majors' IDRs reflect those of their parents. All four banks are supervised by the Reserve Bank of New Zealand (RBNZ) and, as subsidiaries, are also subject to oversight by the Australian Prudential Regulation Authority. RATING SENSITIVITIES - IDRs, Support Ratings and Senior Debt Any changes to these banks' IDRs and Outlooks are directly linked to their parents' IDRs and Outlooks. The Support Ratings and IDRs could also be downgraded should the banks no longer be considered by Fitch to be core subsidiaries. The introduction of the Open Bank Resolution in July 2013 has had no impact on the Majors' Support Ratings, as they reflect the institutional support from their respective parents. KEY RATING DRIVERS - VRs The affirmation of the Majors' Viability Ratings (VR) reflects their strong domestic franchises, consistently healthy operating profitability, generally robust risk management frameworks, and sound capitalisation, as well as improving funding positions. Fitch expects the banks' asset quality to remain sound supported by an improving operating environment and firm underwriting standards. High levels of household debt and large exposure to mortgages are features of the banking system. Rising interest rates are expected over the medium-term but Fitch expects bank balance sheets to be resilient to the asset quality deterioration in a normal interest rate cycle scenario. The RBNZ's limit on mortgages with loan-to-value ratios (LVR) higher than 80% may have helped to slow price increases, especially since growth in these mortgages was closely linked with the sharp increase in New Zealand property prices, particularly in Auckland. Growth in these mortgages has slowed since implementation in October 2013. Impaired loans continued to decline in 2013 as a result of better economic conditions, which helped to resolve stressed exposures, and the agency expects this trend to continue for 2014 although at a slower pace. Potential risks to the Majors' sound asset quality are uneconomical competition, loosening credit standards and external shocks impacting soft commodity prices, and business confidence. Fitch expects the banks' funding profiles to continue improving by focusing on lengthening maturities and the quality of deposits. The Majors remain reliant on offshore wholesale funding markets, but strong customer deposit growth supported the improving funding positions. Short-term wholesale funding instruments were fully covered by liquid assets. Most banks' intergroup funding has generally reduced, providing the banks with larger cushions should they require funding support from their parents. New Zealand's Majors have a strong operating profitability with some of the highest net interest margins, and most efficient cost management, relative to international peers. Operating income could come under pressure as competition for asset growth intensifies. However, this could be mitigated as funding costs, especially in the wholesale markets, significantly declined in 2013. Effective cost management and maintaining sound asset quality will be important drivers for the banks to maintain strong profitability. The Majors' capitalisation remains sound both measured on a risk-weighted and un-risk-weighted basis. Their regulatory capital ratios appear lower than those of their international peers, reflecting the RBNZ's strict capital rules, which were progressively tightened over the past four years. Since 2013, banks must hold more capital for higher LVR loans and concentration risk to the agriculture sector. On un-risk-weighted capital ratios the Majors compare well relative to their international peers despite some differences among the banks. Healthy operating profits should continue to benefit their internal capital generation. RATING SENSITIVITIES - VRs The VRs are sensitive to the operating environment, increased risk appetite and reliance on wholesale funding markets. An adverse economic shock - for instance likely driven by one of New Zealand's major trading partners - that is Australia and China - could have a negative effect on the Majors' asset quality and operating profitability. The VRs could also come under pressure if capitalisation were to weaken significantly, due to strong loan growth and/or asset quality deterioration. Downward rating pressure could also occur if the banks' improved funding and liquidity positions were to deteriorate, most likely driven by a prolonged closure of international wholesale markets. Upgrades are unlikely due to the banks' geographic concentration and funding profiles, which are weaker than those of international peers. The constraint for BNZ, ANZNZ and WNZL is their larger-than-peer industry concentrations, and for BNZ weaker-than-peer capitalisation. KEY RATING DRIVERS AND SENSITIVITIES FOR GOVERNMENT-GURANTEED DEBT The government-guaranteed debt issued by ANZNZ reflects the rating of the New Zealand sovereign (AA/Stable) and is therefore sensitive to any changes to New Zealand's ratings. The rating actions are as follows: ANZ Bank New Zealand Limited (ANZNZ): Long-Term Foreign-Currency IDR affirmed at 'AA-'; Outlook Stable; Short-Term Foreign-Currency IDR affirmed at 'F1+'; Long-Term Local-Currency IDR affirmed at 'AA-'; Outlook Stable; Short-Term Local-Currency IDR affirmed at 'F1+'; Viability Rating affirmed at 'a'; Support Rating affirmed at '1'; Senior unsecured rating for short-term notes affirmed at 'F1+'; Senior unsecured rating for long-term notes affirmed at 'AA-'; and Senior unsecured rating guaranteed by the New Zealand government affirmed at 'AA'. ASB Bank Limited (ASB): Long-Term Foreign-Currency IDR affirmed at 'AA-'; Outlook Stable; Short-Term Foreign-Currency IDR affirmed at 'F1+'; Long-Term Local-Currency IDR affirmed at 'AA-'; Outlook Stable; Short-Term Local-Currency IDR affirmed at 'F1+'; Viability Rating affirmed at 'a'; and Support Rating affirmed at '1'. Bank of New Zealand Limited (BNZ): Long-Term Foreign-Currency IDR affirmed at 'AA-'; Outlook Stable; Short-Term Foreign-Currency IDR affirmed at 'F1+'; Long-Term Local-Currency IDR affirmed at 'AA-'; Outlook Stable; Short-Term Local-Currency IDR affirmed at 'F1+'; Viability Rating affirmed at 'a'; Support Rating affirmed at '1'; and Senior unsecured rating affirmed at 'AA-'. Westpac New Zealand Limited (WNZL): Long-Term Foreign-Currency IDR affirmed at 'AA-'; Outlook Stable; Short-Term Foreign-Currency IDR affirmed at 'F1+'; Long-Term Local-Currency IDR affirmed at 'AA-'; Outlook Stable; Short-Term Local-Currency IDR affirmed at 'F1+'; Viability Rating affirmed at 'a'; and Support Rating affirmed at '1'. Contacts: Primary Analyst Andrea Jaehne Director +61 2 8256 0343 Fitch Australia Pty. Ltd., Level 15, 77 King Street, Sydney NSW 2000 Secondary Analyst Tim Roche Senior Director +61 2 8256 0310 Committee Chairperson Mark Young Managing Director +65 6796 7229 Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 31 January 2014, and 'Rating FI Subsidiaries and Holding Companies' dated 10 August 2012 are available at www.fitchratings.com. Media Relations: Iselle Gonzalez, Sydney, Tel: +61 2 8256 0326, Email: iselle.gonzalez@fitchratings.com. Additional information is available on www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Rating FI Subsidiaries and Holding Companies here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S FREE WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Fitch Australia Pty Ltd holds an Australian financial services licence (AFS licence no. 337123) which authorises it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.

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