OREANDA-NEWS. Fitch Ratings has maintained Kiwibank Limited's (Kiwibank) Long-Term Foreign-Currency Issuer-Default Rating (IDR) of 'AA' and Long-Term Local-Currency IDR of 'AA+' on Rating Watch Negative (RWN) as part of its annual review.

At the same time, the agency has affirmed the bank's Viability Rating (VR) of 'bbb' and Support Rating (SR) of '1'. A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS

IDRS, SENIOR DEBT AND SUPPORT RATINGS

The RWN on Kiwibank's Long-Term IDRs reflects the proposed removal of the guarantee provided by New Zealand Post (NZ Post) in favour of Kiwibank's liabilities as part of an ownership restructure. Under the proposed transaction, NZ Post will sell 45% of its share in Kiwi Group Holdings Limited (KGHL) to New Zealand Superannuation Fund (NZ Super) and the Accident Compensation Corporation (ACC), which are also sovereign-owned entities.

Fitch has maintained Kiwibank's SR despite the possible removal of the guarantee and change in ownership. The agency believes a high propensity for support remains from the bank's ultimate owner, the New Zealand sovereign (AA/F1+). The sovereign retains first right of refusal of ownership and is providing a NZD300m capital facility directly to KGHL to support of the bank as part of the transaction.

Kiwibank's IDRs are currently aligned with the New Zealand sovereign's rating due to the guarantee remaining in place. If the guarantee is removed, a potential downgrade of Kiwibank's Long-Term IDRs will likely be limited to one notch due to a reduced legal commitment to support the bank.

Kiwibank's existing senior debt ratings are unaffected, as the guarantee covers existing liabilities until their final maturity, even if it is removed.

Fitch expects to resolve the RWN once the outcome of the proposal is announced.

KEY RATING DRIVERS

VR

Fitch expects the bank's capitalisation to gradually improve, supported by steady internal capital generation. However, the bank's capital ratios remain low relative to domestic and international peers. Kiwibank maintains adequate buffers over regulatory minimums, although headroom levels are also low relative to peers.

Kiwibank's VR reflects its moderate franchise, resulting in limited pricing power compared with to the major banks. The bank holds about 4% of total lending market share and its retail operations primarily consisting of residential mortgages remain its core business. The bank's growth has moderated to more sustainable levels, resulting in a more conservative risk appetite and robust asset quality. Kiwibank's commercial exposures are low as a proportion of total exposures relative to peers.

Fitch believes the bank's funding and liquidity benefits from the guarantee. If it is removed, it will leave Kiwibank's funding and liquidity more sensitive to market confidence, although the bank has reasonable contingency funding plans. Kiwibank is primarily deposit funded and has a relatively low reliance on short-term wholesale funding.

Improving operating efficiency, the driver of its increased investment in systems and technology, remains a key focus for the bank. Fitch expects benefits to be realised over the next 18 months, however, the bank is likely to face increased earnings and profitability pressure in the short-term due to intense competition, ongoing high investment costs and rising funding costs.

RATING SENSITIVITIES

IDRs, SENIOR DEBT AND SUPPORT RATINGS

A one notch downgrade of Kiwibank's IDRs is likely if the removal of the guarantee provided by NZ Post proceeds. This rating action would not affect existing senior debt ratings, as they remain covered by the existing guarantee until their final maturities. Future senior unsecured debt ratings will be subject to the terms and conditions of the issuance.

Kiwibank's IDRs and SRs are sensitive to changes in New Zealand's Long-Term Foreign - and Local-Currency IDRs, and ultimately, the sovereign's willingness to provide timely support to the bank.

RATING SENSITIVITIES

VR

A weakening in the bank's capitalisation or earnings and profitability, possibly from deterioration in risk appetite or asset quality, could place downward pressure on the VR. A significant improvement in Kiwibank's capitalisation or company profile would be required for positive movement in the VR, which does not appear to be likely in the short-term.

The rating actions are as follows:

Kiwibank Limited:

- Long-Term Foreign-Currency IDR of 'AA'; RWN maintained

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

- Long-Term Local-Currency IDR of 'AA+'; RWN maintained

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

- Viability Rating affirmed at 'bbb'

- Support Rating affirmed at '1'

- Foreign-currency senior unsecured rating affirmed at 'AA'

- Local-currency senior unsecured rating affirmed at 'AA+'

- Commercial paper programme affirmed at 'F1+'.