Fitch Affirms Westpac 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 Westpac New Zealand Limited's (WNZL) Long-Term Issuer Default Ratings (IDRs) at 'A+' as part of its annual review of New Zealand's four major banks. The Outlook on WNZL's Long-Term IDRs is Negative. All other ratings were affirmed. This review does not encompass WNZL's covered bond issuance. Key Rating Drivers IDRS, SENIOR DEBT AND SUPPORT RATING The affirmation of WNZL's IDRs, senior debt ratings and Support Rating reflects Fitch's expectation of an extremely high likelihood of support from the bank's Australian parent, Westpac Banking Corporation (WBC, A+/Negative), if required. We believe WNZL remains a key and integral part of the banking group, with strong integration across management, risk frameworks and internal systems. It provides similar products and services in New Zealand, which is a core market for the group. WNZL's sound profitability also contributes to WBC group's diversified revenue sources. Any WNZL default would also cause significant reputational risk to WBC and materially affect the company profile. The prospect of support is also bolstered by the strong linkages between the Australian and New Zealand banking regulators, which Fitch believes would work together to ensure the stability of both countries' financial systems. The Outlook on WNZL's IDRs reflects that of the parent. VIABILITY RATING WNZL's Viability Rating reflects the strong company profile in New Zealand, giving the bank a level of pricing power in its key segments. This has allowed WNZL to maintain a simple business model without weakening its risk appetite and to support its asset quality and profitability. WNZL is the fourth largest bank in New Zealand in terms of total assets and will most likely maintain its strong market share in the current challenging environment, benefiting from its large distribution channels and ongoing investments in technology and digital capabilities. 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 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 mid-point to 'a-'. We have revised the factor outlook on WNZL's company profile score (a+) to stable from negative. The pandemic has not had a meaningful effect on WNZL's business model and the bank continues to maintain its strong franchise in New Zealand. We do not expect significant weakening in WNZL's market share over the short- to medium-term without substantial reputational damage. We expect WNZL's asset quality to weaken over the next 12 months once the support measures are removed. It's stage 3 loans/gross loans ratio increased to 0.8% in the financial year ended September 2020 (FY20), reflecting the impact from the coronavirus. WNZL's exposure to the most affected industries, such as accommodation and hospitality, is moderate and seems to be broadly in line with other major New Zealand banks. We have retained the negative factor outlook on WNZL's asset quality score (a) to reflect downside risks to our base-case expectations. We have also maintained the negative factor outlook on WNZL's earnings and profitability score (a). WNZL's operating profit/risk-weighted assets - Fitch's core profitability metric - declined to 1.4% in FY20 due largely to higher impairment charges. We believe low interest rates, modest loan growth and ongoing investments will continue to put pressure on WNZL's profitability in FY21. Impairment charges remain one of the key drivers of WNZL's profitability in the near term, and there is still significant uncertainty about the economic conditions in New Zealand. WNZL's common equity Tier 1 (CET1) ratio improved to 12.3% by FYE20, reflecting adequate balance-sheet management and satisfactory profitability. It was also supported by the Reserve Bank of New Zealand's (RBNZ) dividend restriction until at least 31 March 2021. The RBNZ's ongoing liquidity support to the New Zealand banking system means WNZL's funding profile is likely to remain stronger than historical levels over the short to medium term. Fitch has maintained the stable factor outlook on WNZL's capitalisation and leverage (a) and funding and liquidity (bbb+) to reflect sufficient buffers at the current scores. SUBSIDIARY AND AFFILIATED COMPANIES WNZL issues part of its wholesale funding through its wholly owned subsidiary, Westpac Securities NZ Limited, which is used for WNZL's funding purposes only. Fitch does not rate Westpac Securities NZ Limited, only the senior unsecured debt that it issues. The debt ratings are aligned with those of WNZL, as the parent guarantees the debt instruments. RATING SENSITIVITIES IDRS, SENIOR DEBT AND SUPPORT RATING Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade: Any downgrade in WBC's IDRs is likely to be reflected in WNZL's IDRs. The Support Rating and IDRs may be downgraded should Fitch change its view of WNZL's importance to the parent. This could include any decision by WBC to significantly scale back operations in New Zealand as well as a partial or full sale of WNZL. In addition, deterioration in cooperation between the Australian and New Zealand regulators could lower WBC's ability to provide timely support to WNZL, which would also put pressure on the ratings. However, neither of these scenarios is likely in our view. WNZL's senior debt ratings would be downgraded if WNZL's IDRs are downgraded. Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade: An upgrade WBC's IDRs or revision of the Outlook on WBC's Long-Term IDRs would be reflected in WNZL's IDRs or the Outlook on WNZL's Long-Term IDRs as long as there is no change to WBC's propensity to support WNZL. The senior debt ratings will move in line with WNZL'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: WNZL'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 sustainably increasing above 1.5%; - the four-year average of operating profit/risk-weighted assets falling consistently below 2%; - the CET1 capital ratio declining below 10.5% without a credible plan to return above this level. A downgrade of the operating environment midpoint 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 WNZL'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, WNZL'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 Westpac Securities NZ Limited would be downgraded if WNZL's IDRs are downgraded. Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade: The senior debt ratings of instruments issued by Westpac Securities NZ Limited would be upgraded if WNZL'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 WNZL'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 WNZL's funding subsidiary are equalised with WNZL's IDRs as the parents provide guarantees 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 Westpac 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+ Westpac Securities NZ Limited ----senior unsecured; Long Term Rating; Affirmed; A+ Contacts: Primary Rating Analyst George Hong, Director +61 2 8256 0345 Fitch Australia Pty Ltd Suite 15.01, Level 15 135 King Street Sydney 2000 Secondary Rating Analyst Tim Roche, Senior Director +61 2 8256 0310 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/10147163) Solicitation Status (https://www.fitchratings.com/site/pr/10147163#solicitation-status) Additional Disclosures For Unsolicited Credit Ratings (https://www.fitchratings.com/site/pr/10147163#unsolicited-credit-ratings-disclosures) Endorsement Status (https://www.fitchratings.com/site/pr/10147163#endorsement-status) Endorsement Policy (https://www.fitchratings.com/site/pr/10147163#endorsement-policy) ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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