By Bernard Hickey
Standard & Poor's has downgraded the outlook for it’s A+ credit ratings for Kiwibank and its state-owned parent NZ Post to negative from stable, saying there is a one in three chance of a rating cut in the next two years.
The ratings agency said the outlook change was due to rising economic risks in New Zealand, where a surge in house prices in Auckland and Christchurch have sparked fears a future housing downturn could hit bank credit quality.
Last week S&P downgraded the outlooks for three other smaller New Zealand banks, TSB Bank, Heartland Bank and The Co-op Bank, on similar concerns about New Zealand's rising net foreign debt, a rising current account deficit and the New Zealand financial system's reliance on foreign funding. See our earlier article here.
NZ Post's outlook was reduced because Kiwibank now produces 70% of its earnings and the national mail service faces falling letter volumes. NZ Post warned in late January it faced losses from 2016/17 unless it could cut mail deliveries to 3 times a week. NZ Post has NZ$200 million of bonds on issue.
S&P said its stand-alone credit profile of BBB for NZ Post was based on the "very high" likelihood that the New Zealand government would provide timely and sufficient extraordinary support to NZ Post in the event of financial distress."
Questions about government backing for State Owned Enterprises have arisen in recent weeks after the Government said it expected NZ's four biggest banks -- BNZ, ASB, ANZ and Westpac -- to take haircuts on nearly NZ$400 million of unsecured loans to Solid Energy. The state-owned coal miner faces a restructure after a slump in coal prices and an ill-fated plan to expand into other resources wiped out its remaining equity. See our earlier article here.
S&P noted it was watching the government's level of support for NZ Post.
"Although unlikely in the next two years, downward pressure on the ratings may also arise if our assessment of the likelihood that the New Zealand government would provide timely and sufficient extraordinary support to New Zealand Post were to weaken."
NZ Post Chief Financial Officer Mark Yeoman said the outlook change was disappointing and he noted that it reflected S&P's "view on broader external factors rather than organisational specific issues."
Yeoman said NZ Post was "confident in its strategies to enhance earnings from its businesses across the Group."
Fitch affirmed Kiwibank's rating at AA on Monday and left its outlook at stable, however it noted its capital backing was thinner than its larger Australian-owned rivals and it faced intense competition. See Gareth Vaughan's article here.
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.
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.
(Updated with NZ Post reaction)
6 Comments
S&P said its stand-alone credit profile of BBB for NZ Post was based on the "very high" likelihood that the New Zealand government would provide timely and sufficient extraordinary support to NZ Post in the event of financial distress."
Does this supposed NZ government bail-in occur after the depositors have been called upon to do so under OBR? This semantic playing around with depositors' risks is unacceptable - how can a retail depositor make so called investment decisions based on such vague unsubstantiated assertions?
And let's be clear serious money market traders do not leave things to chance - there is a very good reason why William C Dudley, President of the Federal Reserve Bank of New York spent time at Goldman Sachs & Co, just as I am sure certain depositors in NZ banks will secure prior knowledge of supposedly "commercially sensitive information" when needs must.
Sorry, but when has S&P been credible?
Press release last week said 8 banks/credit unions on negative watch due to Akld property market, half those don't even operate/lend in Auckland.
With Kiwibank on negative watch, its only the Aussie banks that are not on negative watch and those building societies and NZ banks not rated by S&P.
Guess Moodys and Fitch may be getting some business enquiries.
the New Zealand financial system's reliance on foreign funding.
I strongly suspect that the 4 big Oz banks make it appear that they rely on foreign funding as a means of offshoring profits rather than an absolute need for funding. So somehow to lend NZ dollars they need to borrow offshore- who offshore has any NZ dollars?
Most money is now created by banks when the make a loan. This is well know, yet we keep on hearing about foreign funding as if it is real.
It is as if there is the real world where thing kind of make sense and then there is a pretend world where people are not allowed to know or to say how the financial and tax systems actually function. I find it strange
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