Kiwibank Aa3 credit rating with stable outlook affirmed by Moody's

Credit rating agency Moody's has affirmed Aa3 credit rating with a stable outlook.

Moody's also has Aa3 ratings on all of ANZ NZ, ASB, BNZ and Westpac NZ. See credit ratings explained here 

Here's Moody's statement

Moody's Investors Service has affirmed Kiwibank Limited's Aa3/Prime-1 long-term/short-term deposit, senior unsecured and issuer ratings.

Moody's has also upgraded the bank's financial strength rating/baseline credit assessment to C-/baa2 from D+/baa3.

The outlook for all ratings is stable.

Ratings rationale

"Kiwibank's Aa3 ratings reflect the strong credit profile of its parent, New Zealand Post, because the parent has provided a guarantee to the bank," says Daniel Yu, a Moody's Assistant Vice President and Analyst.

"In addition, we believe that the New Zealand government will support Kiwibank through New Zealand Post, given that the government has provided the postal company with an uncalled capital facility for the express purpose of supporting Kiwibank's financial position," adds Yu.

Moody's points out that the New Zealand government (Aaa stable) is also highly likely to provide support to New Zealand Post (unrated), given that it is fully owned by the government.

Kiwibank's payment obligations benefit from a deed poll guarantee provided by New Zealand Post . The benefits of this guarantee are incorporated in Kiwibank's long-term ratings, which are lifted five notches above its baseline credit assessment, which assesses its stand-alone credit profile.

As for the upgrade of the bank's baseline credit assessment to baa2, the change reflects the bank's lower reliance on capital support from its parent, as well as the continued improvement in its asset quality metrics.

Historically, Kiwibank's standalone profile has reflected the bank's reliance on capital support from New Zealand Post. Its parent has made regular capital injections since the bank was established in 2002. This capital support has in turn enabled the bank's strong and frequently price-led growth, to meet its mandate to provide a domestically-owned alternative to the subsidiaries of Australia's four major banks, which dominate New Zealand's banking sector.

However, as a result of its high rate of growth and below-peer margins, Kiwibank has not generated sufficient retained earnings to meet its growing capital needs, which has historically constrained its baseline credit assessment.

Over the past few years, the bank has moderated its loan growth to levels more in line with its ability to generate capital internally.

In the four years prior to 2011, its annual loan growth averaged 42%, which was five times the system growth rate of 8%. In contrast, in the four years since 2011, its annual loan growth averaged 9% versus the system growth rate of 3%. This lower growth trend has continued, as seen in the bank's latest half year results. The bank reported loan growth of 2.9% in the six months to 31 December 2014.

Kiwibank's profitability has also improved, driven by an improving net interest margin and a continued focus on expense management. In the six months to 31 December 2014, the bank reported a return on assets of 0.41% compared to 0.29% and 0.32% in the prior two semi-annual periods.

As a result of its moderating loan growth and improved profitability, the bank's ability to generate capital internally has improved. Over the past two years, annual growth in net income averaged 13% compared to risk weighted assets growth of 9%.

While the outlook for profitability in the broader banking sector is challenging given margin pressure from competitive forces and a continued customer preference for fixed-rate mortgages Moody's expects that the bank will manage its loan growth to minimize any need for any further injections of capital from its parent.

In addition, the bank's asset quality metrics have improved. At 31 December 2014, its proportion of impaired and 90 day past due loans to gross loans was 0.28%, the lowest result in six years.

Moody's further points out that while Kiwibank has exhibited stronger asset quality metrics in previous years, the bank's historically strong growth has meant that its loan portfolio was relatively unseasoned.

Moody's expects the bank's asset quality to remain strong, supported by the low interest rate environment in New Zealand and the ongoing growth in the country's economy.

However, there are areas of potential stress. For example, while there are signs that the current house price appreciation in New Zealand is moderating, household indebtedness and house prices remain elevated.

What could change the ratings 

Kiwibank's ratings incorporate a guarantee that reflects the strength of its government-owned parent, New Zealand Post. The bank's ratings are therefore highly correlated to the rating of the New Zealand Government, as well as to the financial profile of New Zealand Post.

Kiwibank Ltd is headquartered in Wellington. It reported assets of NZD17.16 billion (approximately USD13.41 billion) at 31 December 2014.

The principal methodology used in this rating was Global Banks published in July 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.