OREANDA-NEWS. New Zealand's regional lenders (Regionals) are likely to continue their adequate performance over the next year or two, although risks in the operating environment are increasing, Fitch Ratings says in a new report.

Fitch upgraded the Long-Term Issuer Default Rating and Viability Rating of The Co-operative Bank Limited and affirmed the ratings of four other New Zealand-based regional lenders earlier in September 2016. All of the Regionals have a Stable Outlook.

Fitch believes the macro risks within the Regionals' operating environment are increasing. New Zealand household debt levels continue to rise and are high relative to other developed economies - this, along with high and increasing property prices, remain the key risks to the financial system. The Regionals are less exposed to a sharp correction in Auckland property prices relative to the major banks. Weakness in the dairy sector persists and has been a contributor to weaker GDP growth, although strong tourism and construction activity has provided some offset to this.

The Regionals have conservative risk appetites relative to global peers, which is mainly reflected in their high underwriting standards and low reliance on volatile business segments or higher-risk lending. The Regional's risk appetite has benefited their asset quality, which we expect will broadly remain stable in the financial year ending March 2017 (FY17).

Fitch expects earnings and profitability pressure to persist in FY17 due to the easing interest rate cycle, strong competition for loans and increasing competition for deposits. A few of the Regionals have experienced flat or weakening net-interest margins and non-interest income growth but have been able to manage this through loan growth.