Moody's Investors Service has assigned strong issuer and deposit credit ratings to Kiwibank but scores the government owned lender lowly against its peers noting Kiwibank faces profitability challenges due to declining margins and is dependent on capital support from its parent, New Zealand Post, to maintain its rapid growth.
The international credit rating agency has given Kiwibank Aa3 long and short-term deposit and issuer ratings, which are solid investment grade ratings, but a bank financial strength rating (BFSR) of D+.
Moody's says the BFSR reflects Kiwibank's intrinsic financial strength relative to all other rated banks globally. The ratings are assigned from a 13 point scale ranging from A to E including "+" and "-" categories.
In its BFSR ratings Moody's considers five factors; Franchise value, risk positioning, regulatory environment, operating environment, and financial fundamentals.
Recent figures from KPMG's June quarter Financial Institutions Performance Survey show Kiwibank, at 1.13%, has lower interest margins than all of ASB, ANZ, BNZ, Westpac, TSB Bank and SBS Bank. Kiwibank posted a 13% fall in June year profit to NZ$45.8 million.
Recently departed Kiwibank CEO Sam Knowles said the introduction of the Reserve Bank's core funding ratio on April 1, whereby banks must source at least 65% of their funding from retail deposits or wholesale sources with durations of more than 12 months, meant Kiwibank's Australian owned rivals were competing more aggressively for domestic retail deposits forcing up the state owned bank's cost of funding meaning it'll need to raise more money to fund its lending growth offshore.
Moody's has Aa2 deposit and issuer ratings on all of ASB, ANZ, BNZ and Westpac, and C+ BFSR ratings on the four Australian owned banks.
Moody's analyst Daniel Yu said that given Kiwibank's parent New Zealand Post is a state owned enterprise, there was "high potential" for support. Evidence of this was the uncalled capital facility valued in the "low hundreds of millions" of dollars the Government has pledged to support Kiwibank.
Nonetheless Yu noted that during the 2010 financial year, Kiwibank's net interest margin declined sharply and was the main driver of its falling profitability.
"We expect margin compression to continue as competition is likely to remain high," said Yu.
"The bank has identified a number of initiatives to address ongoing profitability pressures. This includes targeting growth in business banking, accessing competitively priced funding through the wholesale market, as well as introducing new deposit products to attract funds."
One of the latter was the introduction of a no term deposit offering savers 5% interest per annum.
Kiwibank, which opened for business in February 2002, had total assets of NZ$12.2 billion at June 30. At the end of June its residential mortgage book stood at NZ$9.6 billion, having grown by about NZ$4.7 billion since the June 2008 quarter, with its lending growth outstripping its Australian owned rivals. Michael Cullen, new NZ Post chairman and Kiwibank director, says he wants the bank to grow into "the biggest bank in New Zealand,"
Read Moody's statement below:
Moody's Investors Service has assigned Aa3 / Prime-1 ratings to the long- and short-term deposit and issuer ratings of Kiwibank Limited.
A Bank Financial Strength Rating (BFSR) of D+ was also assigned. The outlook for all the ratings is Stable. RATINGS RATIONALE "Kiwibank's Aa3 rating reflects the strong credit profile of New Zealand Post, which provides a guarantee to Kiwibank" says Daniel Yu, an Analyst at Moody's Sydney office.
"New Zealand Post is fully-owned by the New Zealand government. We believe that there is a high potential for support, as evidenced by an uncalled capital facility provided by the government, for the express purpose of supporting Kiwibank's financial position" adds Yu.
Kiwibank's BFSR of D+ equates to a baseline credit assessment of Baa3 and reflects the bank's low risk loan book, strong franchise and solid asset quality. However, the bank is facing profitability challenges as a result of declining margins and is dependent on capital support from its parent, to accommodate its rapid rate of growth.
The payment obligations of Kiwibank benefit from a deed poll guarantee provided by its parent, New Zealand Post Limited, a State-Owned Enterprise. The benefits of this guarantee are incorporated in Kiwibank's long-term deposit and issuer ratings, which are lifted six notches above its baseline credit assessment, which assesses its stand-alone credit profile.
Formed in 2001, Kiwibank has grown rapidly over the past nine years to establish a strong franchise which has been built upon a focused customer service and competitive pricing proposition. The bank maintains good representation throughout New Zealand by leveraging off its parent's retail network of PostShops, which also act as bank branches. This has assisted the bank in achieving growth rates well in excess of system.
Predominantly a mortgage lender, Kiwibank's sound asset quality is reflective of its low risk loan portfolio -- residential mortgages have demonstrated low loss rates over time and continue to perform relatively well in the current economic environment. Increased arrears are expected as subdued domestic and international growth continue to pressure households and businesses, and as the relatively unseasoned portfolio continues to mature.
However, the bank's strict underwriting standards and use of mortgage insurance on higher loan to value lending will minimise any potential losses on the portfolio. From a funding perspective, Kiwibank is largely funded by customer deposits, although the bank has taken steps to diversify this profile, for example raising A$250m of term debt in October 2009.
Whilst it creates a reliable source of funding, the bank's large deposit base has hurt margins, which continue to be pressured by intense competition. Kiwibank adopts a price led strategy which has been successful in attracting customers, but at the expense of lower margins.
During FY2010, the Net interest margin declined sharply and was the main driver of the decline in profitability. We expect margin compression to continue as competition is likely to remain high. The bank has identified a number of initiatives to address ongoing profitability pressures. This includes targeting growth in business banking, accessing competitively priced funding through the wholesale market, as well as introducing new deposit products to attract funds.
Capital coverage is also sound for the bank with its Tier 1 ratio standing at 9.8% at FY2010, which includes a NZ$150m preference share issuance in May 2010. We note that the bank's internal capital generation (through retained profits) has been inadequate to support its rapid rate of growth. As a result Kiwibank has relied extensively on New Zealand Post for capital support, which has provided capital assistance each year.
We expect this trend to continue, at least until the bank improves its profitability to accommodate its strong growth. The bank has also focused resources on improving it banking systems which will be important in supporting future growth aspirations. The stable outlook reflects our expectation that government support for New Zealand Post is likely to remain high, which underpins the guarantee it provides to Kiwibank.
Any change in government policy that impacts support could provide positive or negative pressure on the rating.
The principal methodologies used in this rating were Bank Financial Strength Ratings: Global Methodology published in February 2007, and Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology published in March 2007.
Kiwibank is headquartered in Wellington, New Zealand. It reported total assets of NZ$12,238 million (approximately US$8,380million) as at 30 June 2010.
(Update adds Moody's ratings on ANZ, ASB, BNZ and Westpac).