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Fitch Affirms New Zealand's Four Major Banks

Published 22/05/2018, 01:12 pm
Updated 22/05/2018, 01:20 pm
© Reuters.  Fitch Affirms New Zealand's Four Major Banks

© Reuters. Fitch Affirms New Zealand's Four Major Banks

(The following statement was released by the rating agency) Fitch Ratings-Sydney-May 21: Fitch Ratings has affirmed the ratings of New Zealand's four major banks: - ANZ Bank New Zealand Limited (ANZNZ), wholly owned by Australia and New Zealand Banking Group Limited (AA-/Stable); - ASB Bank Limited (ASB), wholly owned by Commonwealth Bank of Australia (AA-/Negative); - Bank of New Zealand (BNZ), wholly owned by National Australia Bank Limited (AA-/Stable); and - Westpac New Zealand Limited (WNZL), wholly owned by Westpac Banking Corporation (AA-/Stable). The Outlook on ASB's Long-Term Issuer Default Rating (IDR) is Negative and that for the remaining banks 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 RATINGS The affirmation of the major banks' IDRs and Support Ratings reflect 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 prospect of support is boosted by strong linkages between the Australian and New Zealand banking regulators, who Fitch believes would work together to ensure the stability of both financial systems.

The Outlooks on the four banks' IDRs reflect those of their parents. ASB's Negative Outlook reflects rating action Fitch took on 6 May 2018 on ASB's parent, CBA, to reflect CBA's risk in remediating shortcomings in its operational risk controls and governance. 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 (LON:PRU) Regulation Authority (APRA). VIABILITY RATINGS 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. The major banks operations are primarily focused within New Zealand where Fitch expects GDP growth to be flat at 2.8% in 2018 before picking up to 3.1% in 2019, which remains higher than the median for 'AA' rated sovereigns. Headwinds for the economy are likely to come from slowing net migration, business uncertainty and a softer housing market, which may weigh on private consumption growth. Despite easing house price growth and improvements in the dairy sector, Fitch believes macroeconomic risks remain elevated due to high leverage in New Zealand households. New Zealand household indebtedness has remained stable at around 168% of disposable income since end-June 2017, higher than at the previous peak of 159% in mid-2009. The high debt levels mean households remain susceptible to higher unemployment or interest rates, which could lead to weaker levels of consumer spending and economic growth that may ultimately impact banks' asset quality and profitability, although this is not Fitch's base case. The major banks broadly have robust risk management frameworks and risk controls and benefit from the integration with their respective parents. Credit risk is the primary form of risk faced by the banks due to their concentration in lending activities, particularly residential mortgages. The underwriting standards of the major banks are generally comparable and have been tightened over recent years, partly driven by regulatory intervention. The banks do not appear to be beset by the same conduct and political issues as their Australian parents at this stage, but this is an area Fitch will continue to monitor. Fitch expects the major banks' asset quality to remain sound relative to international peers over the next year or two, reflecting their conservative risk appetite and favourable operating environment. Loan impairments remain around historic lows, and a mild deterioration in the bank's loan impairment ratios is possible but should be manageable. Fitch believes asset quality and equity buffers have improved over the last four years following several rounds of macro-prudential tightening, which has made the banks less susceptible to large losses in their mortgage books. Fitch believes the major banks will continue to maintain strong operating profitability relative to international peers due to their strong net-interest margins and cost-management efficiency. The major banks' strong franchises and pricing power should continue to support their long-term earnings and profitability profiles, although profit growth is likely to slow over the next year or two as a result of strong competition, lower credit growth and increasing investment and compliance costs. Capitalisation is likely to remain stable in the short term, but strengthen in the medium term as a result of the RBNZ's capital framework review. Capital ratios are reasonably comparable across the four banks and have all increased since 2016. Risk-weighted capital ratios are difficult to compare with international peers due to the different treatment of capital and risk-weight calculations across global regulators. However, the major banks compare favourably with peers against un-risk-weighted capital ratios, which 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. While deposits make up the majority of the funding, the banks are more reliant on offshore wholesale funding relative to international peers. This is partially offset by sound liquidity management. 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. Changes in the parents' ratings are likely to be also reflected in their New Zealand subsidiaries' 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 RATINGS Fitch sees the rating sensitivities as being similar for the major banks due to the comparable rating drivers. The banks' Viability Ratings are sensitive to a weakening in their franchises or further increases in macroeconomic imbalances. These factors, combined with deterioration in economic growth that is more likely to be triggered by external factors, could lead to significant deterioration in asset quality, profitability and capitalisation. Downward pressure on the banks' respective Viability 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 that are weaker than those of international peers. BNZ and WNZL have higher levels of industry and single-name concentration relative to their domestic peers, which reflect 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' Rating on short-term notes affirmed at 'F1+' Rating on long-term notes affirmed at 'AA-' Rating on long-term notes issued through ANZ New Zealand (Int'l) Limited affirmed at 'AA-' Rating on short-term notes issued through ANZ New Zealand (Int'l) Limited affirmed at 'F1+' ANZ Bank New Zealand's Euro medium-term note (EMTN) programme assigned at 'AA-/F1+' ASB Bank Limited: Long-Term Foreign-Currency IDR affirmed at 'AA-'; Outlook Negative Short-Term Foreign-Currency IDR affirmed at 'F1+' Long-Term Local-Currency IDR affirmed at 'AA-'; Outlook Negative Short-Term Local-Currency IDR affirmed at 'F1+' Viability Rating affirmed at 'a' Support Rating affirmed at '1' Rating on long-term notes issued through ASB Finance Limited affirmed at 'AA-' ASB Finance Limited's note programme affirmed at 'AA-/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-' Rating on 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' Rating on long-term notes affirmed at 'AA-' Rating on long-term notes issued through Westpac Securities NZ Limited affirmed at 'AA-'. Contact: Primary Analysts Tim Roche (ANZNZ) Senior Director +61 2 8256 0310 Fitch Ratings Australia Pty Ltd Level 15, 77 King Street, Sydney NSW 2000 Jack Do (ASB, BNZ) Director +61 2 8256 0355 Bert Jansen (WNZL) Director +61 2 8256 0345 Secondary Analysts Tim Roche (ASB, BNZ, WNZL) Senior Director +61 2 8256 0310 Bert Jansen (ANZNZ) Director +61 2 8256 0345 Committee Chairperson Heakyu Chang Senior Director +822 3278 8363 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Bank Rating Criteria (pub. 23 Mar 2018) https://www.fitchratings.com/site/re/10023430 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/site/dodd-frank-disclosure/10031548 Solicitation Status https://www.fitchratings.com/site/pr/10031548#solicitation Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC 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. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE AT HTTPS://WWW.FITCHRATINGS.COM/SITE/REGULATORY. 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. Copyright © 2018 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes 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 Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (the "NRSRO"). While certain of the NRSRO's credit rating subsidiaries are listed on Item 3 of Form NRSRO and as such are authorized to issue credit ratings on behalf of the NRSRO (see https://www.fitchratings.com/site/regulatory), other credit rating subsidiaries are not listed on Form NRSRO (the "non-NRSROs") and therefore credit ratings issued by those subsidiaries are not issued on behalf of the NRSRO. However, non-NRSRO personnel may participate in determining credit ratings issued by or on behalf of the NRSRO.

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