Kiwibank credit rating affirmed at AA but Fitch cautions on increasing competition and weaker capital position than rivals

Fitch Ratings has affirmed Kiwibank's credit rating, but notes the bank faces "intensifying competition" for good quality assets, and points out its capitalisation is weak compared with domestic rivals.

Fitch says given Kiwibank's parent is State Owned Enterprise New Zealand Post, any needed financial support would be likely to come from the Government via NZ Post. Fitch has affirmed Kiwibank's foreign and local currency long-term issuer default ratings at 'AA' and 'AA+' respectably. The Outlooks are Stable. See credit ratings explained here.

"Capitalisation is weak relative to domestic peers, limiting any positive rating action, as the current capital buffers may prove to be too thin considering the competition-driven asset growth combined with rapidly rising house prices," says Fitch.

A Kiwibank spokesman recently told interest.co.nz the bank may look to raise money to "supplement" its capital position to cover any additional capital requirements placed on banks by the Reserve Bank, such as through its macro-prudential tools.

Meanwhile, Fitch also said Kiwibank's cost management remained a weakness and it doesn't expect significant short-term improvements given Kiwibank's large infrastructure investments.

"Any improvements in the bank's cost/income ratio are likely to be driven by stronger revenue generation," Fitch said.

The credit rating agency pointed out Kiwibank's asset quality is improving with its impaired loans declining.

"At the same time, the bank is exposed to intensifying competition for sound-quality assets. In particular, the share of mortgages with loan/value ratio (LVR) above 80% has been growing, especially in light of the recently fast house price appreciation in some regions in New Zealand. However, Fitch takes comfort from the fact that a currently sizeable proportion of (Kiwibank's) higher LVR loans are covered by lenders mortgage insurance, limiting potential losses. In addition, 40% of mortgages exceeding 80% LVR are 'Welcome Home Loans' to first-time buyers who are guaranteed by the New Zealand government."

Fitch's AA foreign long-term issuer default rating on Kiwibank is one notch higher than the AA- ratings it has on the big four banks, - ANZ, ASB, BNZ and Westpac.Last October Standard & Poor's downgraded its Kiwibank rating by one notch to A+, with a stable outlook, from AA- in a move that mirrored its downgrade of NZ Post. S&P's Kiwibank rating is a notch below the AA- rating it has the big four banks. Moody's Investors Service has Kiwibank alongside the big four at Aa3.

As of December 31 Kiwibank's tier one capital ratio (which represents shareholder's funds in the bank), expressed as a percentage of total risk weighted exposures, was 10.6%. Its total capital ratio was 13.5%. The Reserve Bank mandated minimums are 6% and 8%, respectively.

In 2010 the Government put in place what it termed an uncalled capital facility of NZ$300 million that NZ Post can call on in an emergency to help maintain its credit rating and Kiwibank's growth. No money has been drawn down on this thus far.

Here's Fitch's full statement

Fitch Ratings has affirmed Kiwibank Limited's (Kiwibank) Foreign and Local Currency Long-term Issuer Default Ratings (IDRs) at 'AA' and 'AA+' respectably. The Outlooks are Stable. A full list of rating actions is provided at the end of this rating action commentary. Today's rating action has no impact on the ratings of Kiwibank's covered bonds.

Key Rating Drivers - IDRS, Senior Debt and Support Rating

Kiwibank's IDRs, senior debt and support ratings reflect Fitch's view that it is a core subsidiary of the New Zealand Post (NZ Post), which, in turn, is a wholly-owned state enterprise of the New Zealand sovereign (rated AA/Outlook Stable). The agency believes support would be likely to flow from the sovereign through NZ Post to Kiwibank should NZ Post find it difficult to provide support itself.

In addition, NZ Post provides an explicit, unlimited guarantee for the bank's unsecured debt (including customer deposits), except where a payment obligation is expressly excluded from the guarantee; ie subordinated debt. Kiwibank's debt accounts for almost all NZ Post's debt, with most of this debt representing retail deposits held by New Zealanders.

The Stable Outlook reflects the Outlook of the sovereign rating.

Rating Sensitivities - IDRS, Senior Debt and Support Rating

Kiwibank's IDRs, senior debt and Support ratings are sensitive to changes to New Zealand's Long-Term Foreign and Local Currency IDRs, or a change in NZ Post's willingness to provide support to Kiwibank.

Key Rating Drivers - Viability Rating (VR)

Kiwibank's VR has been affirmed, reflecting the bank's growing retail franchise, sound funding position and moderate capitalisation. It also considers Kiwibank's improving profitability and asset quality; however, these could come under pressure given intensifying competition and recent sharp house price appreciation.

Kiwibank's asset quality is improving with declining impaired loans. At the same time, the bank is exposed to intensifying competition for sound-quality assets. In particular, the share of mortgages with loan/value ratio (LVR) above 80% has been growing, especially in light of the recently fast house price appreciation in some regions in New Zealand. However, Fitch takes comfort from the fact that a currently sizeable proportion of higher LVR loans are covered by lenders mortgage insurance, limiting potential losses. In addition, 40% of mortgages exceeding 80% LVR are 'Welcome Home Loans' to first-time buyers who are guaranteed by the New Zealand government.

Fitch considers Kiwibank's capitalisation modest despite the improvement in Fitch core capital ratio to 7.65% at the financial half year ended 31 December 2012 from 7.12% as at 30 June 2012. Larger retained earnings, combined with slower risk-weighted asset growth, supported the improvement in capitalisation. Nevertheless, capitalisation is weak relative to domestic peers, limiting any positive rating action, as the current capital buffers may prove to be too thin considering the competition-driven asset growth combined with rapidly rising house prices.

Cost management remains a weakness and Fitch does not expect significant improvements in the short-term, considering Kiwibank's large infrastructure investments. Any improvements in the bank's cost/income ratio are likely to be driven by stronger revenue generation. Healthy revenue growth - most likely resulting from efficient net interest margin management and prudent loan growth - and a sound funding and liquidity position underpin the VR.

Rating Sensitivities - VR

Kiwibank's VR could be downgraded if asset quality, capitalisation or profitability weakens. Fitch acknowledges the strong housing price inflation since 2012, combined with margin pressure due to fierce competition and a growing proportion of mortgages with LVRs in excess of 80%, could impact Kiwibank's financial health. Its moderate capitalisation could deteriorate if asset quality problems could not be absorbed by the bank's small absolute amount of loan impairment reserves and pre-impairment operating profit. However, Fitch views this as a remote risk.

Deterioration in Kiwibank's funding and liquidity position could also lead to a downgrade of its VR.

Stronger capitalisation, combined with sustainable operating profitability and continued solid asset quality, could lead to an upgrade of its VR.

The rating actions are as follows:

Kiwibank Limited

Foreign Currency Long-Term IDR affirmed at 'AA'; Outlook Stable

Foreign Currency Short-Term IDR affirmed at 'F1+'

Local Currency Long-Term IDR affirmed at 'AA+'; Outlook Stable

Local Currency Short-Term IDR affirmed at 'F1+'

Viability Rating affirmed at 'bbb-'

Support Rating affirmed at '1'

Foreign currency senior unsecured rating affirmed at 'AA'

Local currency senior unsecured rating affirmed at 'AA+'

Commercial paper Programme affirmed at 'F1+'