Fitch Affirms ANZ Bank New Zealand Limited at 'A+'; Outlook Negative

(The following statement was released by the rating agency) Fitch Ratings-Sydney-18 December 2020: Fitch Ratings has affirmed ANZ Bank New Zealand Limited's (ANZNZ) Long-Term Issuer Default Ratings (IDRs) at 'A+' as part of its annual review of New Zealand's four largest banks. The Outlook on ANZNZ's Long-Term IDRs is Negative. All other ratings were affirmed. This review does not include the ratings of covered bonds issued by ANZNZ. Key Rating Drivers IDRS, SENIOR DEBT AND SUPPORT RATING ANZNZ's IDRs, senior debt ratings and Support Rating reflect Fitch's view that there remains an extremely high probability of support from the bank's Australian parent, Australia and New Zealand Banking Group Limited (ANZ, A+/Negative/a+), if required. The IDRs are aligned with ANZ's IDRs to reflect Fitch's view that ANZNZ remains a key and integral part of ANZ, offering products and services to clients in a market the group considers core. Other factors that support alignment with the parent ratings include: slim prospect of sale as it would markedly alter the shape of ANZ's operations; any ANZNZ default would constitute a huge reputational risk to ANZ and damage the franchise; and a strong level of integration between ANZ and ANZNZ's management, risk framework and treasury teams. Fitch believes the Australian and New Zealand banking regulators would work together to ensure the stability of both financial systems, allowing support to flow as required. The Negative Outlook reflects the Outlook on ANZ's Long-Term IDR. VIABILITY RATING ANZNZ's Viability Rating (VR) is driven by the large domestic franchise, which allows for a simple business model and underpins the financial profile. ANZNZ is New Zealand's largest bank, with market share of around 30% for most products. The bank has maintained this share through a number of cycles and we think it is unlikely to be eroded significantly in the short- to medium-term absent a large reputational shock. Fitch has maintained a negative factor outlook on the 'a' operating environment score for New Zealand banks, reflecting the continued risks to our base-case economic forecasts. Effective elimination of the coronavirus in the local community has supported a strong economic recovery, although uncertainty remains, with support measures to unwind during 2021. Fitch currently expects further recovery in GDP growth in 2021, although not sufficiently to offset the decline in GDP in 2020. We are likely to revise this outlook to stable if our base case emerges. However, an outcome that is significantly weaker than our base case may result in a lowering of the midpoint to 'a-'. We have revised the factor outlook on ANZNZ's company profile score (a+) to stable from negative. The pandemic has not had a meaningful effect on ANZNZ's business model and the bank continues to maintain its market leading franchise. We do not expect significant weakening in ANZNZ's strong domestic franchise over the short- to medium-term without substantial reputational damage. We have retained a negative factor outlook on the asset quality (a) and earnings and profitability (a) scores to reflect the downside risk to our base case. Both factors are likely to be negatively affected by a further weakening in the operating environment. We expect asset quality metrics to deteriorate in 2021 as support measures are removed, with stage 3 loans/gross loans potentially peaking at about 1.5% under our base case. Earnings will continue to face headwinds, including low rates, modest system loan growth and continued high investment levels, meaning our core metric of operating profit/risk-weighted assets may remain around 2% under our base case. Conversely, we have maintained a stable factor outlook on capitalisation and leverage (a) to reflect buffers to absorb an outcome weaker than we expect in our base case. ANZNZ's common equity Tier 1 (CET1) ratio increased by 90bp to 11.7% in the year ended 30 September 2020, assisted by the Reserve Bank of New Zealand's (RBNZ's) restrictions on New Zealand banks paying dividends - this restriction remains in place until at least 31 March 2021. Capital ratios should increase longer-term as ANZNZ seeks to implement the RBNZ's strengthened capital framework. Funding and liquidity (bbb+) also maintains a stable factor outlook, reflecting substantial liquidity provided to the market by the RBNZ through several programmes. Liquidity is likely to further increase should these programmes be fully utilised. SUBSIDIARY AND AFFILIATED COMPANY ANZNZ issues its non-New Zealand dollar wholesale funding through a funding subsidiary, ANZ New Zealand (Int'l) Limited (ANZIL). ANZIL is a wholly owned subsidiary of ANZNZ and used for ANZNZ's funding purposes only. Fitch does not rate ANZIL, only the senior unsecured debt issued by it. The debt ratings are aligned with ANZNZ's IDRs, as ANZNZ guarantees ANZIL's debt instruments. RATING SENSITIVITIES IDRS, SENIOR DEBT AND SUPPORT RATING Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade: Any downgrade of ANZ's IDRs is likely to result in a downgrade of ANZNZ's IDRs. Details of the key drivers and sensitivities of ANZ's ratings can be found in "Fitch Affirms Australia and New Zealand Banking Group at 'A+', Outlook Negative" (www.fitchratings.com/site/pr/10136272), published on 21 September 2020. ANZNZ's senior debt ratings will move in line with ANZNZ's IDRs. The Support Rating and IDRs may also be downgraded should Fitch change its view on ANZNZ's importance to ANZ, which could be reflected in partial or full sale of ANZNZ or a decision to significantly scale back operations within New Zealand. In addition, a weakening in cooperation between authorities in Australia and New Zealand may indicate a reduced ability for ANZ to provide support in a timely fashion and put pressure on the ratings. However, neither of these scenarios is likely in our view. ANZNZ's senior debt ratings would be downgraded if ANZNZ's IDRs are downgraded. Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade: An upgrade of ANZ's IDRs or revision of the Outlook on ANZ's Long-Term IDR to Stable would be reflected in ANZNZ's IDRs or the Outlook on ANZNZ's IDRs, as long as there is no change to ANZ's propensity to support ANZNZ. The senior debt ratings will move in line with ANZNZ's IDRs. The Support Rating cannot be upgraded as it is already at the highest level on Fitch's rating scale. VIABILITY RATING Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade: ANZNZ's VR could be downgraded if deterioration in the economic environment results in a combination of: - the four-year average of Stage 3 loans/gross loans increasing sustainably above 1.5%; - the four-year average of operating profit/risk-weighted assets falling consistently below 2%; and - the CET1 capital ratio declining below 10.5% without a credible plan to return above this level. A downgrade of the operating environment mid-point to 'a-' is unlikely to be sufficient by itself to result in a downgrade of the VR. Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade: An upgrade of ANZNZ's VR is unlikely in the short-term. An upgrade is possible in the longer-term if the operating environment stabilises at the current level, ANZNZ's strong company profile remains unchanged, asset quality metrics remain around current levels, improvements in the funding profile are sustained and the capital framework implementation nears completion. SUBSIDIARY AND AFFILIATED COMPANIES Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade: The senior debt ratings of instruments issued by ANZIL would be downgraded if ANZNZ's IDRs are downgraded. Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade: The senior debt ratings of instruments issued by ANZIL would be upgraded if ANZNZ's IDRs are upgraded. Best/Worst Case Rating Scenario International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit [https://www.fitchratings.com/site/re/10111579] REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. Public Ratings with Credit Linkage to other ratings ANZNZ's IDRs are equalised with the Australian parent's IDRs given our view on the potential for support. The ratings of the senior debt issued by ANZNZ's funding subsidiaries are equalised with ANZNZ as it provides a guarantee over these instruments. ESG Considerations Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg ANZ Bank New Zealand Limited; Long Term Issuer Default Rating; Affirmed; A+; Rating Outlook Negative ; Short Term Issuer Default Rating; Affirmed; F1 ; Local Currency Long Term Issuer Default Rating; Affirmed; A+; Rating Outlook Negative ; Local Currency Short Term Issuer Default Rating; Affirmed; F1 ; Viability Rating; Affirmed; a ; Support Rating; Affirmed; 1 ----senior unsecured; Long Term Rating; Affirmed; A+ ----senior unsecured; Long Term Rating; Affirmed; A+ ----senior unsecured; Short Term Rating; Affirmed; F1 ----senior unsecured; Short Term Rating; Affirmed; F1 ANZ New Zealand (Int'l) Limited ----senior unsecured; Long Term Rating; Affirmed; A+ ----senior unsecured; Long Term Rating; Affirmed; A+ ----senior unsecured; Short Term Rating; Affirmed; F1 ----senior unsecured; Short Term Rating; Affirmed; F1 Contacts: Primary Rating Analyst Tim Roche, Senior Director +61 2 8256 0310 Fitch Australia Pty Ltd Suite 15.01, Level 15 135 King Street Sydney 2000 Secondary Rating Analyst George Hong, Director +61 2 8256 0345 Committee Chairperson Heakyu Chang, Senior Director +822 3278 8363 Media Relations: Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@thefitchgroup.com Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com Additional information is available on www.fitchratings.com Additional Disclosures Dodd-Frank Rating Information Disclosure Form (https://www.fitchratings.com/site/dodd-frank-disclosure/10146956) Solicitation Status (https://www.fitchratings.com/site/pr/10146956#solicitation-status) Additional Disclosures For Unsolicited Credit Ratings (https://www.fitchratings.com/site/pr/10146956#unsolicited-credit-ratings-disclosures) Endorsement Status (https://www.fitchratings.com/site/pr/10146956#endorsement-status) Endorsement Policy (https://www.fitchratings.com/site/pr/10146956#endorsement-policy) ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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