Standard and Poor's affirms Kiwibank's AA- credit rating but lowers its outlook to negative from stable

State owned Kiwibank says international credit rating agency Standard & Poor's has lowered the outlook on its AA- credit rating to negative from stable.

Kiwibank said the change came in a review by S&P of its parent New Zealand Post's credit rating.

“New Zealand Post’s rating has been affirmed as AA- but with a negative outlook," Kiwibank CEO Paul Brock said. "This is automatically passed through to Kiwibank."

Kiwibank’s credit rating was reaffirmed at AA-, which is the same rating as the big four Australian-owned banks - ANZ NZ, ASB, BNZ and Westpac NZ, after S&P cut them from AA to AA- in December last year, although S&P's outlook on the four is stable.

Based on data compiled by interest.co.nz, Kiwibank has the highest leverage, or number of times its assets exceed shareholder funds, at 23.4 of any of the New Zealand trading banks. See our bank leverage page here.

S&P credit analyst Adrian Chow said the revised outlook on NZ Post reflects S&P's view that NZ Post faces an "ongoing structural decline in its core business" being standard-letter deliveries, which will continue to weaken the company’s business risk profile over time.

“In addition, we expect the company will become increasingly reliant on more competitive earning streams such as parcel and express courier deliveries, which will place further pressure on its business risk profile,” said Chow.

"The rating on NZ Post could be lowered within the next two years if the structural erosion of the standard-letter volumes materially accelerates and is not offset by improvements to its delivery network," Chow added.

Meanwhile Nico de Lange, another S&P credit analyst, said the Kiwibank outlook revision mirrored the change in the outlook on NZ Post.

"We equalize the ratings on Kiwibank with those on the bank's parent, NZ Post, due to the benefit of NZ Post's unconditional guarantee for all of the bank's senior obligations. We believe that there are no significant changes in rating factors, other than the change in the outlook of the bank’s parent, that affect our rating assessment of Kiwibank," said de Lange.

In a separate statement NZ Post CEO Brian Roche said the ongoing decline in NZ Post’s traditional mail business reflected global postal trends.

Although acknowledging the change in S&P's outlook was "disappointing," Roche said he remained confident NZ Post is on track with strategies to meet the "challenges posed by these global trends."

“New Zealand Post is well positioned to deliver on a sustainable physical network, growing the bank, creating a digital future and a superior customer experience,” Roche added.

See S&P's statement on NZ Post below:

Standard & Poor’s Ratings Services said today that it had affirmed its 'AA-/A-1+' corporate credit and related debt ratings on government-owned postal operator New Zealand Post Ltd. (NZ Post). At the same time, we revised the outlook on the long-term rating to negative from stable.

“The outlook revision reflects our view that NZ Post faces an ongoing structural decline in its core business--standard-letter deliveries--which will continue to weaken the company’s business risk profile over time,” Standard & Poor’s credit analyst Adrian Chow said.

“In addition, we expect the company will become increasingly reliant on more competitive earning streams such as parcel and express courier deliveries, which will place further pressure on its business risk profile.”

The ratings on NZ Post are based on our view of the company's stand-alone credit profile (SACP), which Standard & Poor's assesses at 'bbb+', as well as our opinion that there is a "very high" likelihood that the New Zealand government (New Zealand, foreign currency AA/Stable/A-1+; local currency, AA+/Stable/A-1+) would provide timely and sufficient extraordinary support to NZ Post in an event of financial distress.

The SACP reflects our view of the company's "strong" business profile and "intermediate" financial risk profile.

The negative outlook reflects our view that ongoing deterioration in the standard-letters business and NZ Post’s reliance on more competitive earning streams will weaken its business risk profile over time. We expect, however, the company will continue to focus on improving the sustainability and efficiency of its mail delivery network to partly offset these weaknesses.

The rating on NZ Post could be lowered within the next two years if the structural erosion of the standard-letter volumes materially accelerates and is not offset by improvements to its delivery network. In addition, we may lower the rating if FFO-to-debt (excluding banking operations) is sustained below 15%, due to persisting weak operating performance, debt-funded acquisitions, or debt-funded distributions.

Further pressure on the ratings may also arise in the unlikely event of a weakening in our assessment of the likelihood that the N.Z. government would provide timely and sufficient extraordinary support to NZ Post. An outlook revision to stable will require the stabilization of the postal business as well as a more conservative financial profile commensurate with the 'AA-' rating, including FFO-to-debt (excluding banking operations) greater than 30%.

And here's its Kiwibank statement:

Standard & Poor’s Ratings Services said today that it had affirmed its 'AA-/A-1+' ratings on Kiwibank Ltd.

The outlook on the long-term rating was revised to negative from stable, following a similar revision of the outlook on Kiwibank’s parent company New Zealand Post Ltd. (NZ Post; AA-/Negative/A-1+; see research update titled "New Zealand Post Ltd. Ratings Affirmed At 'AA-/A-1+'; Outlook Revised To Negative On Weakening Business Risk Profile", published to Global Credit Portal on Jan. 31, 2012).

"The outlook revision mirrors the change in the outlook on the long-term rating on NZ Post to negative from stable," Standard & Poor's credit analyst Nico de Lange said. "We equalize the ratings on Kiwibank with those on the bank's parent, NZ Post, due to the benefit of NZ Post's unconditional guarantee for all of the bank's senior obligations. We believe that there are no significant changes in rating factors, other than the change in the outlook of the bank’s parent, that affect our rating assessment of Kiwibank."

Our ratings on Kiwibank reflect the stand-alone credit profile (SACP) for banks operating only in New Zealand; and Kiwibank's "moderate" business position, "strong" capital and earnings, "moderate" risk position, "average" funding, and "adequate" liquidity.

The SACP for Kiwibank is 'bbb'. The negative outlook on Kiwibank reflects the outlook on its parent, NZ Post. The ratings on Kiwibank should remain equated with those on NZ Post, unless there is a significant dilution or withdrawal of the guarantee provided by NZ Post. Should this occur, the rating on Kiwibank could be lowered near or to its SACP assessment.

(Update adds S&P's comments and statements).