OREANDA-NEWS. Fitch Ratings has affirmed the ratings of New Zealand's four major banks; ANZ Bank New Zealand Limited (ANZNZ), ASB Bank Limited (ASB), Bank of New Zealand (BNZ) and Westpac New Zealand Limited (WNZL). The Outlooks remain Stable. A full list of rating actions can be found at the end of this commentary. This review does not include ratings of covered bonds issued by the banks.

KEY RATING DRIVERS

IDRS, SENIOR DEBT AND SUPPORT RATING

The affirmation of the major banks' Issuer Default Ratings (IDR) and Support Ratings reflect Fitch's view of an extremely high likelihood of support from the banks' parents, if required. Fitch sees the banks as core subsidiaries of their respective Australian parents, due to their focus on customers and products that align with their parents' strategies, leading to the major banks consistently contributing to the groups' objectives. The strong likelihood of support is reinforced by regulatory linkages between Australian and New Zealand authorities. We expect both authorities to work closely to ensure the stability of their financial systems.

The Outlooks on the four major banks' IDRs reflect those of their parents. All four are supervised by the Reserve Bank of New Zealand (RBNZ) and, as subsidiaries of Australian banks, are also subject to oversight by the Australian Prudential Regulation Authority (APRA).

VIABILITY RATING

All four major banks share similar rating drivers, reflecting their comparable characteristics. The affirmation of their Viability Ratings reflects the banks' conservative risk appetite and robust risk-management practices, which have been tightened as a result of the RBNZ's macro-prudential rules to address increasing risks in the operating environment. The Viability Ratings also take into consideration the banks' strong company profiles, strengthened funding and capital positions but also weakened profit growth and expected asset-quality pressure from weak dairy-prices.

Almost all of the major banks' operations are in New Zealand, where we expect 2016 GDP growth to stabilise at 2.7%. Weaknesses in the agriculture sector and the peaking of Christchurch's rebuilding following the 2011 earthquake will have a negative effect on the country's GDP, although strong net immigration should support the construction industry and tourism could offset some of the agricultural challenges. However, housing affordability - especially in Auckland - has continued to weaken in 2016, with house-price growth exceeding income growth. This has resulted in historically high-household debt. New Zealand's household-debt/disposable-income ratio rose to 165% at end-June 2016, making households susceptible to higher unemployment and interest rates. A significant reduction in net immigration could also affect house prices, especially in Auckland, reducing the banks' collateral buffers. However, these scenarios are not Fitch's base-case for the next year or two.

The major banks' risk-management frameworks and tight risk-controls are tempered slightly by industry concentration, particularly in residential-mortgages, commercial real-estate and agriculture. Underwriting standards appear sound, with some mortgage underwriting criteria having been influenced by regulatory changes. The RBNZ introduced macro-prudential tools in October 2013 to limit the growth of residential mortgages with loan/value ratios (LVR) above 80%. Further tightening in the rules occurred in November 2015 and is planned for October 2016 to limit growth of investor mortgages with an LVR above 60% to just 5% of the total increase across New Zealand, as this group appears to have driven house-price and mortgage increases.

In the past, macro-prudential tools only had a temporary effect on house-price growth. However, the agency believes these measures continue to strengthen bank balance sheets and create buffers in the event of a house-price correction. The asset-quality of the major banks' residential-mortgage portfolios should continue to perform strongly in the absence of interest-rate and unemployment-rate increases. The major banks' serviceability assessment incorporates buffers over current mortgage-rates, ensuring borrowers' ability to repay their loans in a higher interest-rate environment.

Fitch expects some asset-quality deterioration in the major banks' rural exposures over the next 12 to 18 months due to low dairy-prices persisting over three consecutive seasons. The major banks monitor their agriculture exposures carefully and consider supporting their rural customers whose businesses are considered viable through the cycle. Farm prices have not fallen significantly despite dairy-price weaknesses. However, a prolonged dairy downturn could pressure farm values and lead to higher bank losses. Historically, bank losses remained low, but this cycle suggests a longer-than-normal period of low dairy-prices could lead to sharper farm-value declines. Fitch believes the major banks are well-positioned to manage sharp asset-quality deterioration in their rural and residential-mortgage books. However, a combined scenario could significantly affect their financial profiles.

The major banks have strong operating profitability, with some of the widest net-interest margins and most-efficient cost-management relative to international peers. We expect the major banks' profitability to remain stronger than their international peers, although profit generation is likely to be weaker as asset competition is expected to shift to deposits in light of the banks' preparations of the introduction of the net stable funding ratio (NSFR) in early-2018. The major banks will need to comply with the NSFR as part of their Australian parents. This is likely to result in a continuing margin squeeze, which combined with increasing loan-impairment charges and increasing investments in technology, risk-management and compliance, could result in weaker profit growth over the next year or two.

Fitch expects the major banks to maintain their improved funding and liquidity positions despite preparations for the NSFR. Nevertheless, we expect the banks to continue lengthening their wholesale funding maturity profiles in 2017, especially as they are reliant on offshore wholesale funding markets in the medium-term due to a lack of deposits in New Zealand. Liquid assets should fully cover short-term wholesale funding instruments. The major banks are also reducing inter-group funding, due to new inter-group exposure restrictions introduced by APRA in 2015. BNZ has already fully repaid its inter-group funding.

The major banks' capitalisation remains sound relative to most international peers, as measured on both a risk-weighted and unrisk-weighted basis. Regulatory capital ratios appear lower than those of many international peers, reflecting the regulator's higher risk-weighting requirements on residential-mortgages and strict capital rules - which have been tightened progressively over the past four years. The major banks' unrisk-weighted capital ratios compare well with most international peers and internal capital generation should continue to benefit from adequate operating profitability, despite probable modest profit growth.

SUBSIDIARY AND AFFILIATED COMPANY

The major banks issue a portion of their wholesale funding through their funding subsidiaries, ANZ New Zealand (Int'l) Limited, ASB Finance Limited, BNZ International Funding Limited and Westpac Securities New Zealand Limited. These entities are wholly owned subsidiaries of their respective parents and are used for their parents' funding purposes only. Fitch does not rate the subsidiaries, only their senior unsecured debt. These ratings are aligned with those of their parents, as the parents guarantee the debt instruments.

RATING SENSITIVITIES

IDRS, SENIOR DEBT AND SUPPORT RATINGS

The major banks' IDRs and Outlooks are equalised with those of their respective parents. Any change in the parent ratings are likely to be reflected in the major banks' ratings. The Support Ratings and IDRs may be downgraded should Fitch change its view of the major banks' core subsidiary roles or if the authorities change their cross-border regulatory approach.

VIABILITY RATING

The major banks' Viability Ratings have similar rating sensitivities, reflecting their comparable rating drivers. The Viability Ratings are sensitive to macroeconomic imbalances, such as rising household-debt due to unsustainable house-price growth and weaker underwriting criteria and risk controls. These factors, combined with a major deterioration in economic growth - most likely to be triggered by a sharp slowdown in New Zealand's major trading partners, Australia or China - could lead to significant asset-quality deterioration, affecting operating profitability, capitalisation and funding and liquidity positions. Downward rating pressure could occur if the banks' improved funding and liquidity positions deteriorate. This could be caused by a prolonged closure of international wholesale markets.

Rating upgrades are unlikely due to the banks' geographic concentration and funding profiles, which are weaker than those of international peers. BNZ and WNZL are constrained by industry and single-name concentrations, which are larger than those of their peers.

SUBSIDIARY AND AFFILIATED COMPANIES

The ratings of the senior unsecured securities issued by the major banks' funding subsidiaries are sensitive to the same factors as their respective parents' IDRs.

The rating actions are as follows:

ANZ Bank New Zealand Limited:

Long-Term Foreign-Currency IDR affirmed at 'AA-'; Outlook Stable

Short-Term Foreign-Currency IDR affirmed at 'F1+'

Long-Term Local-Currency IDR affirmed at 'AA-'; Outlook Stable

Short-Term Local-Currency IDR affirmed at 'F1+'

Viability Rating affirmed at 'a'

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-'

Senior unsecured rating for long-term notes issued through ANZ New Zealand (Int'l) Limited affirmed at 'AA-'

Senior unsecured rating for short-term notes issued through ANZ New Zealand (Int'l) Limited affirmed at 'F1+'.

ASB Bank Limited:

Long-Term Foreign-Currency IDR affirmed at 'AA-'; Outlook Stable

Short-Term Foreign-Currency IDR affirmed at 'F1+'

Long-Term Local-Currency IDR affirmed at 'AA-'; Outlook Stable

Short-Term Local-Currency IDR affirmed at 'F1+'

Viability Rating affirmed at 'a'

Support Rating affirmed at '1'

Senior unsecured rating for long-term notes issued through ASB Finance Limited affirmed at 'AA-'

Senior unsecured rating for short-term notes issued through ASB Finance Limited affirmed at 'F1+'.

Bank of New Zealand:

Long-Term Foreign-Currency IDR affirmed at 'AA-'; Outlook Stable

Short-Term Foreign-Currency IDR affirmed at 'F1+'

Long-Term Local-Currency IDR affirmed at 'AA-'; Outlook Stable

Short-Term Local-Currency IDR affirmed at 'F1+'

Viability Rating affirmed at 'a'

Support Rating affirmed at '1'

Senior unsecured rating affirmed at 'AA-'

Senior unsecured rating for long-term notes issued through BNZ International Funding Limited affirmed at 'AA-'.

Westpac New Zealand Limited:

Long-Term Foreign-Currency IDR affirmed at 'AA-'; Outlook Stable

Short-Term Foreign-Currency IDR affirmed at 'F1+'

Long-Term Local-Currency IDR affirmed at 'AA-'; Outlook Stable

Short-Term Local-Currency IDR affirmed at 'F1+'

Viability Rating affirmed at 'a'

Support Rating affirmed at '1'

Senior unsecured rating for long-term notes issued through Westpac Securities New Zealand Limited affirmed at 'AA-'.