S&P: Ratings On Rabobank New Zealand Affirmed At 'A/A-1'; Outlook Stable
We have affirmed our ratings on Rabobank New Zealand, as we continue to factor in an uplift above the bank's stand-alone credit profile (SACP), reflecting our view that the parent, Rabobank Group, is likely to provide timely financial support to Rabobank New Zealand, if needed. We have revised Rabobank New Zealand's SACP lower by one notch, to 'bbb-' from 'bbb'.
We believe economic risks facing financial institutions operating in New Zealand have heightened as a result of continued strong growth in residential property prices nationally, coupled with an increase in private sector credit growth. Furthermore, we believe the risk to financial institutions is amplified by the New Zealand economy's external weaknesses--in particular its persistent current account deficits and high level of external debt (see "New Zealand Financial Institution Ratings Unchanged Despite Property Price Concerns," published on Aug. 23, 2016).
In our view, this has increased the overall banking system risk and we have therefore increased the risk weights on all lending exposures under our capital methodology to reflect the heightened risk facing financial institutions operating in New Zealand-- although we note Rabobank New Zealand has no direct exposure to residential property. Consequently, our forecasted risk-adjusted capital (RAC) ratios for all financial institutions in New Zealand are now lower than would otherwise be the case. For Rabobank New Zealand, our revised forecasted RAC ratio is now consistent with a lower capital assessment, and as such, a lower SACP. We note the revision in our capital assessment for Rabobank New Zealand does not reflect any action undertaken by the bank with regard to its approach toward its capitalization.
Our long-term issuer credit rating on Rabobank New Zealand continues to receive uplift above the bank's SACP, reflecting our view that Rabobank Group is likely to provide timely financial support to Rabobank New Zealand, if needed. This is based on our opinion that Rabobank New Zealand remains a highly strategic subsidiary of the group. This recognizes the integral role Rabobank New Zealand's main business lines play in relation to the groupwide strategy, which emphasizes food and agriculture lending. We also consider it highly unlikely that Rabobank Group will divest Rabobank New Zealand, particularly given the subsidiary's success over a sustained period as one of New Zealand's largest providers of food and agriculture lending. At the same time, we note the high degree of oversight provided by Rabobank Nederland covering Rabobank New Zealand's operations, which demonstrates a commitment to supporting the longevity of Rabobank's operations in New Zealand.
The stable outlook on Rabobank New Zealand mirrors that on its parent, Rabobank Group. This is because we expect to maintain the long-term rating on Rabobank New Zealand one notch below that on its parent, which recognizes the bank's strategic importance to the broader group.
We believe the most likely downward scenario for Rabobank New Zealand over the next two years would be a lowering of the rating on its parent. We currently see very limited prospects of a significant deterioration in Rabobank New Zealand's operating performance within the next two years such that we would consider revisiting the strategic importance of the New Zealand operations to the overall group, which would also be a trigger for a lower rating.
Similarly, we believe upward rating prospects for Rabobank New Zealand over the next two years are almost entirely dependent on an upward rating movement for its parent.