Fitch says big 4 banks asset quality, capitalisation, profitability still strong, but wary of wholesale funding dependence

International credit rating agency Fitch Ratings has affirmed its solid investment grade ratings on New Zealand's big four banks - ANZ, ASB, BNZ, and Westpac. Fitch notes that asset quality, capitalisation and profitability remain strong but says a dependence on wholesale funding, especially from overseas, remains a risk.

Fitch's announcement comes as one of its major rivals, Moody's Investors Service, has the four on review for a possible ratings downgrade. And as Standard & Poor's, the third of the big three international credit ratings agencies, is reviewing the methodology it uses to rate banks which could potentially see its ratings on the four lowered.

Moody's rates all four banks "Aa2." Its review is due to be completed before mid-May.

Read Fitch's statement below:

Fitch Ratings has today affirmed the Local and Foreign Currency Long-Term and Short-Term Issuer Default Ratings (IDR) of ASB Bank Limited (ASB), Bank of New Zealand (BNZ) and Westpac New Zealand Limited (WNZL) at 'AA' and 'F1+' respectively.

The Outlook on the Long-Term IDRs is Stable.

At the same time, the agency affirmed ANZ National Bank Limited's (ANZNB) Long-Term and Short-Term IDRs at 'AA-' and 'F1+' respectively. The Outlook is Positive.

All other ratings of the four major New Zealand banks were also affirmed and a full list of rating actions is included at the end of this rating action commentary.

The rating action has no impact on BNZ's covered bond rating of 'AAA'. The rating actions follow the affirmation of the Australian parents' ratings on 14 April 2011. The Long-Term and Short-Term IDRs, as well as the Support Rating of all four banks, reflect a very strong support from their respective parent.

All four banks are supervised by the Reserve Bank of New Zealand (RBNZ) and, as subsidiaries, are also subject to a degree of oversight by the Australian Prudential Regulation Authority (APRA). Fitch believes that there is an extremely high probability that the Australian parent banks would be willing and able to provide support should it be required. Fitch also considers there to be a moderate probability that the RBNZ would provide direct support to its four largest domestic banks, if required.

The operating environment in New Zealand has been challenging since mid-2008: unemployment peaked at 7% in December 2009; current property prices are still around 5% below their peak; and discretionary spending remains weak. At the same time, earthquakes in the Canterbury region in September 2010 and February 2011 have constrained economic growth, but rebuilding activity should provide some stimulus later in 2011.

Furthermore, historically high commodity prices are benefitting important export trades, such as dairy products. Fitch expects the economy to continue to recover, albeit at a slow pace. The rebuilding of the earthquake-affected areas and the Rugby World Cup which will take place later in 2011, will likely contribute positively to the country's economic growth.

"Despite this challenging operating environment, New Zealand's four major banks have performed well compared to their international peers," says Andrea Jaehne, Director in Fitch's Financial Institutions team.

"Asset quality, capitalisation and profitability remain strong. However, a dependence on wholesale funding, particularly from offshore markets, remains a risk," she adds.

Improvements are taking place, with the RBNZ requiring that banks fund at least 65% of their loan books with customer deposits and long-term wholesale funding instruments such as longer-dated term debt and covered bonds. This funding ratio requirement will increase to 70% in July 2011 and 75% in 2012.

Regulatory capital ratios of New Zealand banks compare well with international peers particularly when the relatively strict requirements of the RBNZ, such as higher deductions for items like dividend payments, are taken into account. All four major banks are owned by the major Australian banks and accounted for around 80% of the New Zealand banking system at end-2010.

ANZ National Bank Limited (ANZNB): Long-Term IDR affirmed at 'AA-'; Outlook Positive; Short-Term IDR affirmed at 'F1+'; Local Currency Long-Term IDR affirmed at 'AA-'; Outlook Positive; Local Currency Short-Term IDR affirmed at 'F1+'; Individual Rating affirmed at 'B'; Support rating affirmed at '1'; Senior unsecured rating for Short-Term notes affirmed at 'F1+'; Senior unsecured rating for Long-Term notes affirmed at 'AA-'; and Senior unsecured rating guaranteed by the New Zealand government affirmed at 'AA+'.

ASB Bank Limited (ASB): Long-Term IDR affirmed at 'AA'; Outlook Stable; Short-Term IDR affirmed at 'F1+'; Local Currency Long-Term IDR affirmed at 'AA'; Outlook Stable Local Currency Short-Term IDR affirmed at 'F1+'; Individual Rating affirmed at 'B'; Support rating affirmed at '1'; and Senior unsecured rating affirmed at 'AA'.

Bank of New Zealand (BNZ): Long-Term IDR affirmed at 'AA'; Outlook Stable; Short-Term IDR affirmed at 'F1+'; Local Currency Long-Term IDR affirmed at 'AA'; Outlook Stable Local Currency Short-Term IDR affirmed at 'F1+'; Individual Rating affirmed at 'B'; Support rating affirmed at '1'; and Senior unsecured rating affirmed at 'AA'.

Westpac New Zealand Limited (WNZL): Long-Term IDR affirmed at 'AA'; Outlook Stable; Short-Term IDR affirmed at 'F1+'; Local Currency Long-Term IDR affirmed at 'AA'; Outlook Stable Local Currency Short-Term IDR affirmed at 'F1+'; Individual Rating affirmed at 'B'; Support rating affirmed at '1'; and Senior unsecured rating affirmed at 'AA'.