Fitch Ratings sees incoming RBNZ capital requirements reinforcing the position of NZ's big 4 banks within their Aussie parent banking groups

Fitch Ratings has revised its credit ratings on New Zealand's big four banks to positive from stable because it believes incoming Reserve Bank regulatory capital requirements will bolster the kiwi subsidiaries' position within their Australian parent groups in the event of bank distress.

Fitch has revised the outlook on its ANZ New Zealand, BNZ and Westpac NZ credit ratings to positive from stable and affirmed the ratings at A+. It has also revised the outlook on ASB's AA- credit rating to positive from stable.

This has occurred because Fitch expects to improve the shareholder support aspect of its ratings on the four once they are allowed, under Reserve Bank capital rules, to issue loss-absorbing capacity (LAC) instruments to their Aussie parents, which is expected by late 2028. LAC can be a cushion of equity and debt instruments that allows a bank to absorb unexpected losses without failing or needing a bailout.

 In its bank capital review last year the Reserve Bank said the introduction of LAC will increase the minimum regulatory capital required by the big four banks by 25% to $72.2 billion from $57.6 billion. LAC debt instruments could see the outstanding balance written down or converted into equity if a bank is in distress. The big four banks will be required to issue their LAC instruments to their Australian parent banks. This LAC is cheaper funding than Common Equity Tier 1 capital, regarded as the highest quality capital and consisting of the likes of ordinary shares and retained earnings.

"The Reserve Bank of New Zealand's new capital framework mandates internal issuance of LAC instruments to the Australian parents of the New Zealand major banks, supporting a single-point-of-entry approach to resolution. We believe the placement of such instruments would provide a mechanism for the New Zealand subsidiaries to access the LAC buffers raised by their parents, reinforcing the subsidiaries’ position within the parent banks’ broader resolution groups," Fitch says.

"Currently, the New Zealand major banks' Shareholder Support Ratings (SSRs), which underpin their senior unsecured debt and Long-Term Issuer Default Ratings (IDR), are anchored by their parents’ Viability Ratings. This indicates the risk of the parent bank failing, rather than parents’ Long-Term IDRs, which include the added protection from the parents’ resolution debt buffers. This reflects uncertainty over whether the New Zealand banks' senior creditors would benefit from those buffers under the existing framework, given differences between the Australian and New Zealand regulatory capital regimes."

ASB's AA- rating, one notch higher than the A+ of ANZ NZ, BNZ and Westpac NZ, is because its parent, Commonwealth Bank of Australia, has an AA rating from Fitch, one notch higher than the AA- ratings the other Aussie parents of NZ's major banks, ANZ Banking Group, National Australia Bank and Westpac Banking Corporation have.

 Interest.co.nz reported last December that Fitch saw the new Reserve Bank capital requirements as a potential catalyst for big bank credit rating upgrades. 

The Reserve Bank says it'll consult on an exposure draft specifically for the LAC requirements next year, with the phase-in of major bank LAC rules from December 2028.

Registered banks are required by the Reserve Bank to have a credit rating. See credit ratings explained here.