Kiwibank credit rating cut alongside parent NZ Post's to one notch below the big 4 banks as it eyes covered bond issue

Kiwibank, which is eyeing its first covered bond issue, has had its Standard & Poor's (S&P) credit rating downgraded one notch to A+ with a stable outlook from AA-.

S&P's downgrade of Kiwibank came as it also dropped its rating on the bank's parent, New Zealand Post, a notch, also to A+ from AA- with a stable outlook. The downgrade for Kiwibank means its S&P rating is now a notch below the AA- the credit rating agency has the big four banks - ANZ, ASB, BNZ and Westpac - at.

"The downgrade reflects our view of the group's significant contingent exposure to its large and growing banking operations, Kiwibank, as well as our expectation that NZ Post's revenue and earnings will increasingly be focused on the group's more-competitive businesses such as parcels, express courier, and financial services," said S&P credit analyst Adrian Chow.

Chow added that although the NZ Post businesses have favourable medium-term growth prospects, the "structural erosion" in NZ Post's standard-letter delivery business is expected to continue.

Kiwibank chief executive Paul Brock said although the downgrade was disappointing, Kiwibank remained among the highest rated banks in the world.

Fitch Ratings has Kiwibank at AA, which is one notch higher than the AA- ratings it has on the big four banks, and Moody's Investors Service has Kiwibank and the big four at Aa3.

Credit ratings matter for the banks because they can effect their wholesale borrowing costs. A higher rating generally means lower borrowing costs and vice versa.

In Kiwibank's annual results announcement in August, when it posted record annual profit of NZ$79.1 million, Brock said customer deposits accounted for 83% of the bank's funding. However, Kiwibank did establish a commercial paper programme denominated in euros in late 2010. And interest.co.nz reported in June that it has hired Britain's Barclays Capital to arrange a covered bond programme, appears to have established a covered bond trust, and could borrow about NZ$1 billion through issuing covered bonds. See more on covered bonds here.

Meanwhile, S&P said its ratings on the NZ Post group reflect a "very high" likelihood the government would provide "timely and sufficient extraordinary support" to NZ Post in an event of financial distress.

"In calculating our credit metrics for NZ Post, we fully deconsolidate Kiwibank. We do, however, consider Kiwibank to be a significant contingent liability for the group. NZ Post guarantees Kiwibank's deposits (NZ$11.6 billion at June 30, 2012) and borrowings (NZ$1.8 billion). Nevertheless, the New Zealand government's provision of a NZ$300 million uncalled capital facility will help NZ Post manage this contingent liability," Chow said.

The stable outlook on the new rating for both NZ Post and Kiwibank reflects S&P's expectation NZ Post will continue to reduce costs and improve the efficiency of its mail delivery network to offset the ongoing decline in standard-letter volumes.

"At the current rating, we also expect the company to maintain funds from operations to debt (excluding banking operations) of more than 20%," said Chow.

NZ Post chief executive Brian Roche said although the S&P downgrade reflects the need for fundamental change in the lmail business, NZ Post was "well advanced" in putting the strategies in place to deal with these challenges.

“New Zealand Post has developed and is evolving the plans to achieve a sustainable physical network as well as continuing with the strategies of growing the bank and creating a digital future,” Roche said.

After one-off adjustments, NZ Post's annual net profit after tax was just NZ$700,000 higher than Kiwibank's at NZ$79.8 million.