Fitch Upgrades Kiwibank's VR to 'bbb'; Affirms Other Ratings

Tue May 6, 2014 2:13am EDT

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(The following statement was released by the rating agency) SYDNEY, May 06 (Fitch) Fitch Ratings has upgraded Kiwibank Limited's (Kiwibank) Viability Rating (VR) to 'bbb' from 'bbb-', and affirmed the Foreign and Local Currency Long-Term Issuer Default Ratings (IDRs) at 'AA' and 'AA+' respectively. The Outlooks are Stable. A full list of rating actions is provided at the end of this commentary. Today's rating action has no impact on the ratings of Kiwibank's covered bonds. KEY RATING DRIVERS AND SENSITIVITIES - IDRS, SENIOR DEBT AND SUPPORT RATINGS Kiwibank's IDRs, senior debt and support ratings reflect Fitch's view that it is a core subsidiary of New Zealand Post (NZ Post), which in turn is a wholly-owned state enterprise of the New Zealand sovereign (AA/Stable). The agency believes support would likely flow from the sovereign through NZ Post to Kiwibank should NZ Post face any difficulties in providing support itself. In addition, NZ Post provides an explicit, unlimited guarantee for the bank's senior unsecured debt (including customer deposits). Kiwibank accounts for 94% of NZ Post's assets. Its debt, the majority of which is made up of retail deposits held by New Zealanders, accounts for almost all of NZ Post's debt. The Stable Outlook reflects the Outlook of the sovereign rating. Kiwibank's IDRs, senior debt and Support ratings are sensitive to changes to New Zealand's Long-Term Foreign and Local Currency IDRs, or a change in NZ Post's, and in turn the sovereign's willingness to provide support to Kiwibank. KEY RATING DRIVERS - VR The upgrade of Kiwibank's VR reflects the bank's entering a phase of less aggressive growth, associated strengthened underwriting, and consistent, sound asset quality, which compares favourably against domestic peers. The upgrade also takes into account a more sustainable operating profitability brought on by increased diversification in revenue streams. Capitalisation has continued to strengthen but remains moderate relative to its peers. Kiwibank's VR also reflects its growing retail franchise, and its good funding position, which benefits from its indirect government ownership and the aforementioned guarantee. Fitch believes that Kiwibank's asset quality will continue to hold up well - notwithstanding previous periods of rapid growth - on the back of solid prospects for the New Zealand economy with an improving labour market and stricter underwriting criteria. It improved in the first half of the financial year ending 30 June 2014 (1H14) due to better economic conditions and lower risk appetite. The likelihood of a rise in the policy rate in 2014 and 2015 poses some risk to asset quality. However, Kiwibank partially mitigates this risk by assessing loan serviceability at rates substantially above the bank's current mortgage rates. The authorities' 10% limit on new mortgages with loan-to-value ratios greater than 80%, introduced in late 2013, should also help asset quality. Over the past three years, the bank's capitalisation improved significantly (FYE11: 5.31%) due to growth in retained profits and regular small capital injections provided by its parent, NZ Post. Fitch expects it to continue to improve albeit at a slower pace than over the last three years. Kiwibank's Fitch Core Capital ratio was 8.67% at end-December 2013, which the agency considers adequate despite being lower than domestic peers'. Fierce competition and ongoing technology investments are likely to place some pressure on profitability. However, Kiwibank has achieved good growth in non-interest income over the last three years, mainly through the sale of insurance and wealth management products, providing the bank with increased diversification in earnings. Fitch expects the bank will maintain a healthy profitability in the short to medium term, although profit growth is likely to slow. Kiwibank's funding and liquidity position has remained sound, supporting its current rating level. Customer deposits remain the main funding source, although short-term wholesale funding is increasing within the mix. This makes Kiwibank more susceptible to investor sentiment. In addition, refinancing risk from increasing medium- to longer-term funding is mitigated by strong liquidity levels and the binding guarantee by NZ Post. RATING SENSITIVITIES - VR A return to more aggressive loan growth and weaker underwriting standards, a significant weakening in asset quality, and/or deterioration in capitalisation may place downward pressure on Kiwibank's VR. Further positive VR momentum appears unlikely in the short to medium term. The rating actions are as follows: Kiwibank Limited: Foreign Currency Long-Term IDR affirmed at 'AA'; Outlook Stable; Foreign Currency Short-Term IDR affirmed at 'F1+'; Local Currency Long-Term IDR affirmed at 'AA+'; Outlook Stable; Local Currency Short-Term IDR affirmed at 'F1+'; Viability Rating upgraded to 'bbb' from 'bbb-'; Support Rating affirmed at '1'; Foreign currency senior unsecured rating affirmed at 'AA'; Local currency senior unsecured rating affirmed at 'AA+'; and Commercial Paper Programme affirmed at 'F1+'. 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 Sabine Bauer Senior Director +852 2263 9966 Applicable criteria, "Global Financial Institutions Rating Criteria", dated 31 January 2014; "Rating FI Subsidiary and Holding Companies", dated 10 August 2012; and "Assessing and Rating Bank Subordinated and Hybrid Securities", dated 31 January 2014, 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 Assessing and Rating Bank Subordinated and Hybrid Securities Criteria here Additional Disclosure Solicitation Status null/gws/en/disclosure/solicitation?pr_id=828715 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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