Fitch affirms big 4 NZ banks' credit ratings but cautions on housing market, high LVR lending and drought

Fitch Ratings has affirmed its AA- credit ratings on New Zealand's big four banks but says it's monitoring developments in the property market, and the impact of the drought on farmers' ability to service debt.

The credit rating agency notes strong price increases in the property market over the past 12 months and says downward rating pressure could occur if asset quality deteriorates considerably.

"House price inflation, combined with margin pressure due to keen competition and an increase of the proportion of mortgages with loan to value ratios in excess of 80%, are a potential risk to the banks' asset quality and profitability," Fitch says.

Reserve Bank Governor Graeme Wheeler last week said about 30% of bank lending was being done at loan-to-valuation-ratios above 80%.

Although noting ANZ, ASB, BNZ and Westpac have net interest margins that remain strong relative to those of international peers, Fitch said an increasingly buoyant property market - especially in Auckland and Christchurch - could result in weakening of the banks' currently sound asset quality, especially if unemployment rose.

"All four banks have fairly significant exposures to the agriculture sector - in particular dairy farming. Although prospects are currently sound for this industry, asset quality could come under pressure if adverse weather conditions affect the debt service capacity of farmers - especially in light of the still high levels of leverage within this industry," says Fitch.

The credit rating agency's affirmation of the big four New Zealand banks' ratings comes after Fitch last month affirmed its AA- long-term ratings on the Australian parents of New Zealand's big four banks, but highlighted their high relative reliance on wholesale funding and high household indebtedness in Australia.

See credit ratings explained here.

And here's Fitch's full statement:

Fitch Ratings has affirmed the ratings of ANZ Bank New Zealand Limited (ANZ NZ), ASB Bank Limited (ASB), Bank of New Zealand Limited (BNZ) and Westpac New Zealand Limited (WNZL). A full rating breakdown is provided below. The ratings of the covered bonds issued by the banks are not affected.

Rating Action Rationale

The affirmation of the New Zealand major banks' IDRs and Support Ratings reflect Fitch' view of an extremely high likelihood of support, if required, from their parent banks. This is based on the banks' role as core subsidiaries of their respective Australian parents. The Outlooks of the banks' IDRs reflect those of the parents. All four banks are supervised by the Reserve Bank of New Zealand (RBNZ) and, as subsidiaries, are also subject to oversight by the Australian Prudential Regulation Authority. Fitch expects that support for the New Zealand major banks would be provided by their respective parents in the first instance. There is a strong probability that the RBNZ or the New Zealand government would provide direct support to the four major banks if the parents are unable to provide support.

Rating Sensitivities - IDRS, Support Rating and Senior Debt

Any changes to the IDRs and Outlooks of these banks are directly linked to their parents' IDRs and Outlooks. The Support Ratings and IDRs could also be downgraded if the banks were no longer considered by Fitch to be core subsidiaries of their parent banks.

Key Rating Drivers - VRs

The affirmation of the Viability Ratings (VR) of the New Zealand major banks reflects their strong domestic franchises, consistently healthy operating profitability, generally robust risk management framework, and sound capitalisation.

The VRs also consider the banks' reliance on offshore wholesale markets for funding. However, strengthened liquidity positions mitigate the risk of a short-term funding market closure; the banks' wholesale funding maturities within 12 months are fully covered by liquid assets as per their respective financial year end in 2012. The introduction of the core funding ratio by the RBNZ has also helped to improve the banks' funding positions, resulting in strong customer deposit growth and the issuance of long-term debt, in particular covered bonds.

Fierce competition for customer deposits and sound quality assets has placed significant pressure on the banks' net interest spreads. However, net interest margins remain strong relative to those of international peers. Operating income is likely to come under pressure as competition intensifies, despite increasing demand for credit. Effective cost management and continued sound asset quality will be important drivers for the banks to maintain strong profitability.

Asset quality has improved since FY09, benefiting from tighter underwriting criteria and private sector deleveraging. However, an increasingly buoyant property market - especially in Auckland and Christchurch - could result in weakening of the currently sound asset quality, especially if unemployment were to increase. All four banks have fairly significant exposures to the agriculture sector - in particular dairy farming. Although prospects are currently sound for this industry, asset quality could come under pressure if adverse weather conditions affect the debt service capacity of farmers - especially in light of the still high levels of leverage within this industry.

Rating Sensitivities - VRs

The VRs of all four banks could be downgraded should their funding and liquidity positions weaken materially - most probably as a result of a dislocation in the wholesale funding market. Downward rating pressure could also occur if asset quality deteriorates considerably. Fitch is monitoring developments in New Zealand's property market which has seen strong price increases in the past 12 months. House price inflation, combined with margin pressure due to keen competition and an increase of the proportion of mortgages with loan to value ratios in excess of 80%, are a potential risk to the banks' asset quality and profitability. The VRs could also come under pressure if capitalisation weakens significantly, especially in light of the loan growth and related risks.

The upgrade of the VR of any bank is a remote prospect due to the geographic concentration of the banks and their funding profiles, which are weaker than those of international peers. Rating constraint for ANZ NZ and WNZL is their weaker-than-peer impaired loan ratios, and for BNZ weaker-than-peer capitalisation.

All four major New Zealand banks are owned by the major Australian banks and accounted for around 90% of the New Zealand banking system at end-2012.

The rating actions are as follows:

ANZ Bank New Zealand Limited (ANZ NZ):

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 guaranteed by the New Zealand government affirmed at 'AA'

ASB Bank Limited (ASB):

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'

Bank of New Zealand Limited (BNZ):

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-'

Westpac New Zealand Limited (WNZL):

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 debt guaranteed by the New Zealand government affirmed at 'AA'