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S&P lowers outlook on Kiwibank's 'A' credit rating to stable from positive citing uncertainty about the bank's digital strategy caused by the COVID-19 pandemic

S&P lowers outlook on Kiwibank's 'A' credit rating to stable from positive citing uncertainty about the bank's digital strategy caused by the COVID-19 pandemic

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 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.

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Perhaps Microsoft’s decision to build a NZ-based data centre could ease some regulatory pains associated with a cloud banking strategy.

As I understand it, Microsoft are building a "datacentre region". They will likely be co-locating in an existing datacentre.

Yeah, I think the PM got a little ahead of herself.

Has any of this difficulty at Kiwibank stemmed from the lack of support during the Key led coaltion governments? One had the distinct impression KB was kneecapped in order to keep it sidelined while the Aussie banks had a free for all. Considering where Key ended up after his political career you really do have to wonder....

Doubt it. Kiwibank never envisioned growing as large as they did as quickly as they did. Investment decisions early on in cheap but functional infrastructure came back to bite them.

I was at KB at the time. It was extremely poor decision making coupled with some additionally poor leadership. The foolish idea of seeing SAP's Banking Services "solution" as a viable option for a new core system basically is what kicked everything over.

COVID was created in a lab, or related to 5G?
Vaccinations that give you autism?
Area 51 is a secret UFO base?
Kiwibank secretly kneecapped?Silly conspiracy theories, all of them.
Key's been gone for years. As they said in Frozen -let it go

Lol...if I'm replying to someone quoting cartoon movies it does make me wonder...regardless KB was clearly held back from business banking and the government wouldn't extend funding to develop the business as fast as it could well have been. Everyone can see Key is simply a toady for the big banks.

And closet happy clapper

What happened to all the talk of Kiwibank buying BNZ a few months ago? That looked like an obvious strategy to get a bonus new core banking system as a result and align (or move) their internal systems with BNZ?

That was due to a slow news day in the media. And any merger with BNZ would mean they'd be dealing with core systems already older (but more scalable) than what Kiwibank has now. Funnily enough, I understand they both have the same credit card core system and are actually both looking at doing a replacement for their primary core banking systems from the same vendor.

OK I had read that BNZ put a new core in around 2017 or at least there was a project to do so - assumed it had gone live by now...

Beware the ides of March. It was apparently notable for the Romans as a deadline for settling debts. Unfortunately those “out of the know” will probably have to wait until May (?) for analysis of the banks’ freshly minted collective provisions and expensing for non performing loans for the 6 months ending March. Knees together after that for June. In the meantime keep a close eye on actions of “those in the know” even if only for interest as a powerless observer.

Even if they can build it (benefit of the doubt) can any bank gain any real competitive advantage from a 'digital strategy'? The way to build competence is to start with a small budget transformation project and let it scale organically with the revenue it generates. If it doesn't work at the $Xm scale it certainly won't work at the $XXm or $XXXm scales.

I'm not sure about competitive advantage. They might nonetheless get results by replicating other bank's 'digital strategies', where the R&D dollars have already been spent and outcomes proven. Starting small and validating ideas before scaling up sounds good, but they may have fundamental tech deficits to address before any commercially viable projects can be taken to market.

It's a lot of investment if they can't quantify any return.

Yes. Above all, this is true.

I'll give thema digital strategy. Let your customers do their banking digitally instead of instore.

Oh wait they already did that a decade ago.

Kiwibanks online banking has been one of the best since it launched. Seriously what is there left to do?