S&P Global Ratings has lowered the outlook on its Kiwibank 'A' credit rating to stable from positive due to uncertainty about the bank's digital strategy caused by the COVID-19 pandemic.
The credit rating agency cites uncertainties around the scope and timing of Kiwibank's digital strategy, the delivery of which is a key factor in its assessment of the bank's credit profile.
In February Kiwibank CEO Steve Jurkovich told interest.co.nz he was due to present an investment case to the bank's board in April or May that would see a major shift to cloud computing systems as part of a digital blueprint for Kiwibank. Some $10 million to $12 million had been spent assessing core banking system replacement options for the abandoned CoreMod project, including work on a cloud banking strategy and how this might work in with Reserve Bank regulation including outsourcing. The full project was likely to cost hundreds of millions of dollars over the next few years, Jurkovich said in February.
Jurkovich, a former ASB executive, took the reins at Kiwibank in July 2018 after Kiwibank abandoned its CoreMod core banking system upgrade, booking impairments on that project of $101 million.
Whilst reducing its outlook on Kiwibank to stable from positive, S&P affirmed the bank's "A’ long-term and ‘A-1’ short-term credit ratings.
"The revision in outlook reflects the uncertainty around the scope and timing of Kiwibank's digital strategy because of the COVID-19 outbreak and containment measures as well as potential related credit losses. In our view, the delivery of Kiwibank's digital strategy is a key factor in our assessment of the bank's credit profile. We believe that any technology platform upgrades that Kiwibank might undertake will not progress sufficiently in the next two years to support a higher credit profile, particularly in light of possible COVID-19 related delays," S&P says.
"Because of COVID-19 related containment measures, we expect a multifold increase in credit losses across the New Zealand banking system. While we acknowledge there remains a degree of uncertainty around the level of provisions, non-performing assets, and credit growth in New Zealand over the coming two years, we expect the rating on Kiwibank would be resilient in the face of a substantial but temporary increase in credit losses."
"In addition, we consider the recent announcement by the Reserve Bank of New Zealand outlining restrictions on both ordinary share dividend payments and the redemption of non-Common Equity Tier 1 capital instruments to be supportive of Kiwibank's ability to absorb losses outside our base case," says S&P.
"As a New Zealand government-related entity, our rating on Kiwibank benefits from three notches of extraordinary support from its 'bbb' stand-alone assessment. This is because we consider that Kiwibank plays an important role to the New Zealand government and that the bank has a very strong link to the government because of its indirect ownership."
Kiwibank's shareholders are NZ Post, the NZ Super Fund and Accident Compensation Corporation.
"We could raise the rating on Kiwibank if we gain sufficient clarity with respect to the bank's broader technology strategy, its supportiveness to the bank's long-term business franchise, and the progression of its implementation within the next two years. Although unlikely in the next two years, any strengthening of Kiwibank's role and link to the New Zealand government could also result in a higher rating," S&P says.
"We consider the most likely downside scenario to be our assessment of Kiwi Group Holdings Ltd's capital strength. If Kiwibank were to experience credit losses or technology-related impairment costs well in excess of our expectation--further depressing its profitability and capital position--we could lower the rating in the next two years. In addition, while unlikely, any weakening in our view of Kiwibank's role and link to the New Zealand government could result in a lower rating."
Kiwi Group Holdings Ltd is Kiwibank's immediate parent company.
A Kiwibank spokeswoman says the bank remains committed to transforming its business to become a better, bolder and more sustainable bank, and achieving its goal of "powering" more Kiwis to get ahead.
"Like all companies, we are closely monitoring the ongoing impact of COVID-19 on the New Zealand economy and on the bank. We will continue to update the market on any material changes to our strategy as required," the Kiwibank spokeswoman says.
*This article was first published in our email for paying subscribers. See here for more details and how to subscribe.