July 25, 2017 / 6:00 AM / 2 years ago

Fitch Affirms Ratings of New Zealand's Four Major Banks

(The following statement was released by the rating agency) SYDNEY, July 25 (Fitch) Fitch Ratings has affirmed the ratings of New Zealand's four major banks: ANZ Bank New Zealand Limited (ANZNZ), ASB Bank Limited (ASB), Bank of New Zealand (BNZ) and Westpac New Zealand Limited (WNZL). These banks are wholly owned subsidiaries of Australia and New Zealand Banking Group Limited (AA-/Stable), Commonwealth Bank of Australia (AA-/Stable), National Australia Bank Limited (AA-/Stable) and Westpac Banking Corporation (AA-/Stable) respectively. The Outlooks on each of the bank's Long-Term Issuer Default Rating (IDR) is Stable. A full list of rating actions can be found at the end of this commentary. This review does not include ratings of covered bonds issued by the banks. KEY RATING DRIVERS IDRS, SENIOR DEBT AND SUPPORT RATING The affirmation of the major banks' IDRs and Support Ratings reflects Fitch's view that there continues to be an extremely high likelihood of support from the banks' respective Australian parents, if required. Fitch sees the banks as core subsidiaries of their banking groups, providing key products and services to a market long considered core to the groups, as well as having strong integration across management, risk frameworks and treasury teams. The possibility of support is reinforced by strong regulatory linkages between Australia and New Zealand banking authorities. Fitch believes the regulators would work closely together to ensure the stability of both financial systems. The Outlooks on the four banks' IDRs reflect those of their parents. All four are supervised by the Reserve Bank of New Zealand (RBNZ) and, as subsidiaries of Australian banks, are also subject to oversight by the Australian Prudential Regulation Authority (APRA). VIABILITY RATING The four major banks continue to share common rating drivers reflecting their similar business models and strong domestic franchises. This allows the banks to generate solid and sustainable profits through a cycle without a material weakening in risk appetite. This in turn supports asset quality, capitalisation and, to a lesser extent, funding and liquidity. All of the bank's operations are essentially conducted within New Zealand where Fitch expects solid GDP growth of 2.7% in 2017, above the median for 'AA' rated sovereigns. While a number of risk factors such as the weak agricultural sector and unsustainable house price growth have started to ease, Fitch still sees the level of macroeconomic risk as heightened due to the high leverage of New Zealand households. Household indebtedness continues to be at historically high levels, increasing to 167% of disposable income at end-March 2017, higher than the previous peak of 159% in mid-2009. This high level of indebtedness means that households are increasingly susceptible to higher unemployment and interest rates, although this is not Fitch's base case. High leverage may also lead to weaker levels of consumer spending and economic growth, which may also impact the banks' asset quality and profitability. The major banks have robust risk management frameworks and risk controls, and gain benefits from their respective parents. Credit risk is the primary form of risk faced by the banks, which is predominantly through their skew towards loans, particularly residential mortgages. The underwriting standards of the banks appear sound and are increasingly similar to each other, particularly for mortgages, driven by the various rounds of macro-prudential tools implemented by the RBNZ since October 2013. Borrower assessment includes interest rate buffers to ensure applicants have the ability to service their loans in a higher interest-rate environment. Whilst the macro-prudential tools have only had a temporary effect on slowing house-price growth in the past, the agency believes these measures have continued to strengthen the balance sheets of the banks and created greater equity buffers in the event of a house-price correction. Fitch expects the asset quality of the major banks to continue to perform well, with the current low levels of impairment remaining in the absence of an external shock to the economy or higher interest rates and unemployment. Following the improvement in the per kilogram milk solid price towards the end of 2016 and into 2017, Fitch expects the asset quality of the major banks' dairy exposures to gradually improve over the next 18 months should the price improvements be sustained. Farm prices have not fallen significantly and losses have been modest, partly due to the banks supporting borrowers through the cycle. Fitch believes that as cash flow improves, there is likely to be some degree of deleveraging in this sector as facilities are repaid. The major banks have strong operating profitability, with some of the strongest net-interest margins and most efficient cost-management relative to international peers. Fitch believes the banks will continue to maintain this position, reflecting their strong franchises and price setting ability. However, high competition for deposits and loans, tighter macro-prudential settings, ongoing investment into technology and a general industry trend to reduce fees and charges will challenge profit growth over the next 12-24 months. The major banks' capitalisation is likely to remain stable in the short term but Fitch expects higher capital requirements in the medium-to-long term as a result of the regulator's review of the regulatory capital framework. Levels are reasonably consistent across the four banks, are sound relative to most international peers, and benefit from a strong level of potential ordinary support from their respective parents. Risk-weighted ratios appear lower than some international peers due to a conservative implementation of global rules by the regulator. Un-risk-weighted ratios compare more favourably against peers and overall capitalisation should continue to be supported by strong operating profitability. Fitch does not expect the funding structure of the major banks to significantly change in the medium term due to the structure of the New Zealand market. While deposits make up the majority of the funding, the banks are more reliant on offshore wholesale funding relative to international peers. Improvements in the funding profiles are more likely to be through lengthening of the wholesale maturity profile, which appears to have broadly been a focus for the banks given their parents' preparations for the Net Stable Funding Ratio. SUBSIDIARY AND AFFILIATED COMPANIES The major banks issue a portion of their wholesale funding through their funding subsidiaries, ANZ New Zealand (Int'l) Limited, ASB Finance Limited, BNZ International Funding Limited and Westpac Securities NZ Limited. These entities are wholly owned subsidiaries of their respective parents and are used for their parents' funding purposes only. Fitch does not rate the subsidiaries, only their senior unsecured debt. These ratings are aligned with those of their parents, as the parents guarantee the debt instruments. RATING SENSITIVITIES IDRS, SENIOR DEBT AND SUPPORT RATINGS The major banks' IDRs and Outlooks are equalised with those of their respective parents. Any change in the parent ratings are likely to be also reflected in their New Zealand subsidiary ratings. The Support Ratings and IDRs may be downgraded should Fitch change its view of the major banks' core subsidiary roles or if the authorities change their cross-border regulatory approach. VIABILITY RATING Fitch sees the rating sensitivities of the major banks as similar, given their comparable rating drivers. The Viability Ratings would be sensitive to further increases in macroeconomic imbalances such as rising household-debt levels and unsustainable house-price growth. These factors combined with deterioration in economic growth - more likely to be triggered by external factors such as a slowdown in New Zealand's major trading partners - could lead to significant deterioration in asset quality, profitability and capitalisation. Downward pressure on the banks' respective ratings could also occur if Fitch observed a weakening in the banks' funding and liquidity positions, which could be caused by a prolonged closure of international wholesale markets. Rating upgrades are unlikely due to the banks' geographic concentration and funding profiles, which are weaker than those of international peers. BNZ and WNZL have higher levels of industry and single-name concentration relative to their domestic peers, reflective of their business models. SUBSIDIARY AND AFFILIATED COMPANIES The ratings of the senior unsecured securities issued by the major banks' funding subsidiaries are sensitive to the same factors as their respective parents' IDRs. The rating actions are as follows: ANZ Bank New Zealand Limited: 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-' Senior unsecured rating for long-term notes issued through ANZ New Zealand (Int'l) Limited affirmed at 'AA-' Senior unsecured rating for short-term notes issued through ANZ New Zealand (Int'l) Limited affirmed at 'F1+'. ASB Bank Limited: 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 long-term notes issued through ASB Finance Limited affirmed at 'AA-' Senior unsecured rating for short-term notes issued through ASB Finance Limited affirmed at 'F1+'. Bank of New Zealand: 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 affirmed at 'AA-' Senior unsecured rating for long-term notes issued through BNZ International Funding Limited affirmed at 'AA-'. Westpac New Zealand Limited: 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 long-term notes issued through Westpac Securities NZ Limited affirmed at 'AA-'. Contact: Primary Analyst Jack Do (ASB, WNZL) Director +61 2 8256 0355 Fitch Australia Pty Ltd, Level 15, 77 King Street, Sydney NSW 2000 Tim Roche (ANZNZ, BNZ) Senior Director +61 2 8256 0310 Secondary Analyst Tim Roche (ASB, WNZL) Senior Director +61 2 8256 0310 Jack Do (ANZNZ, BNZ) Director +61 2 8256 0343 Committee Chairperson Heakyu Chang Senior Director +822 3278 8363 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. 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