OREANDA-NEWS. Fitch Ratings has affirmed the ratings of New Zealand's four major banks (the Majors): ANZ Bank New Zealand Limited (ANZ NZ), ASB Bank Limited (ASB), Bank of New Zealand (BNZ), and Westpac New Zealand Limited (WNZL). A full list of rating actions can be found at the end of this commentary. The ratings of the covered bonds issued by these banks are not affected.

KEY RATING DRIVERS - IDRs, Support Ratings and Senior Debt
The affirmation of the Majors' IDRs and Support Ratings reflect Fitch's view of an extremely high likelihood of support from their parent banks, should it be required. Fitch views the banks as core subsidiaries of their respective Australian parents given their strong and consistent contributions to the groups' objectives, as well as the strong economic and regulatory linkages between Australia and New Zealand.

The Outlooks on the Majors' IDRs reflect those of their parents. All four banks 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.

RATING SENSITIVITIES - IDRs, Support Ratings and Senior Debt
The Majors' IDRs and Outlooks are directly linked to their parents'. The Support Ratings and IDRs could also be affected should Fitch's view of their core subsidiary roles change.

KEY RATING DRIVERS - VRs
Due to their comparable characteristics, all four Majors share similar rating drivers and sensitivities. The affirmation of their Viability Ratings (VR) reflects their conservative risk appetites and robust risk management practices, as well as their strong domestic franchises and consistently healthy operating profitability. The VRs also consider the banks' sound capitalisation and improved funding positions.

Fitch views the banks' risk management frameworks as robust and risk controls are tight. The New Zealand banking system is characterised by high household debt levels relative to international peers, and all four Majors have large exposures to mortgages and agriculture. To address this risk exposure, particularly as interest rates remain below historical averages, buffers are added to market rates when assessing a borrower's capacity to service a loan. In addition, the banks have reduced their exposures to mortgages with loan to value ratios (LVR) exceeding 80% since the introduction of the 10% limit on new mortgages by the RBNZ in October 2013. This should help mitigate the potential risk to bank asset quality in the event of a material downturn in property values due to the strong house price growth experienced in some pockets of the New Zealand market during 2014.

Fitch expects the Majors' asset quality to remain sound in 2015, reflecting the solid operating environment and firm underwriting standards. Risks to their asset quality include a sudden external shock which negatively impacted soft commodity prices, a sharp increase in interest rates, and a reduction in underwriting standards in the pursuit of growth. However, these scenarios are not Fitch's base case. The increase of the official cash rate (OCR) by 100bp and the sharp fall in dairy prices during 2014 had not impacted the banks' asset quality as of December 2014.

Fitch expects the Majors will maintain their improved funding and liquidity positions. A continued focus on longer-term wholesale funding and improving the quality of deposits is likely in 2015. They are likely to remain reliant on offshore wholesale funding markets into the medium term, reflecting a general lack of deposits in the New Zealand market. Nevertheless, Fitch does not expect a material reduction in the proportion of customer deposits within the Majors' funding mix. Short-term wholesale funding instruments remain fully covered by liquid assets. Most banks' intergroup funding has generally reduced, providing the banks with larger cushions should they require funding support from their parents.

New Zealand's Majors have a strong operating profitability with some of the highest net interest margins, and most efficient cost management, relative to international peers. However, operating income could come under some pressure as competition for asset growth intensifies. Tighter asset spreads may be partly offset by more narrow funding spreads although Fitch does not expect significant improvements in the banks' funding costs. Effective cost management and maintaining sound asset quality will be important drivers for the Majors to maintain strong profitability.

The Majors' capitalisation remains sound relative to most international peers, measured on both a risk-weighted and un-risk-weighted basis. Regulatory capital ratios appear lower than those of international peers, reflecting the regulator's strict capital rules, which progressively tightened over the past four years. In general, New Zealand banks have to use higher risk-weightings on residential mortgages compared with international peers. On un-risk-weighted capital ratios the Majors compare well despite some differences. Internal capital generation should continue to benefit from healthy operating profitability.

Almost all of the Majors' operations are in New Zealand. The economic environment has been improving since 2011 and Fitch expects GDP growth of around 2.6% in 2015. The labour market is sound with unemployment at 5.7% at end-2014, down from 6% at end-2013. House prices, especially in Auckland and Christchurch, have risen significantly. Auckland's house price growth reflects the lack of housing and building consents in the years up to 2012, coupled with strong net immigration into Auckland over the past two years. House price growth in Christchurch reflects the severe damage to houses during the 2010 and 2011 earthquakes. New Zealand's economic growth has been dominated by vibrant construction activities and a high demand for agriculture products.

RATING SENSITIVITIES - VRs
The VRs are sensitive to increased risk appetite, a material deterioration of the operating environment, and a substantial weakening in funding profiles. The VRs could come under pressure should capitalisation weaken significantly due to strong loan growth and/or asset quality deterioration. VRs could also be pressured by an adverse economic shock, which would likely be driven by one of New Zealand's major trading partners, either Australia or China, having a negative effect on the Majors' asset quality and operating profitability. Downward rating pressure could also occur if the banks' improved funding and liquidity positions were to deteriorate, most likely driven by a prolonged closure of international wholesale markets.

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 their larger-than-peer industry and single name concentrations. BNZ's VR is also constrained by weaker-than-peer capitalisation.

SUSBIDIARY AND AFFILIATED COMPANY KEY RATING DRIVERS & RATING SENSITIVITIES
The Majors' funding subsidiaries, ANZ New Zealand (Int'l) Limited (ANZNZIL), ASB Finance Limited (ASBFL), BNZ International Funding Limited (BNZIFL), and Westpac Securities New Zealand Limited (WSNZL), are wholly owned subsidiaries of their respective parents. These entities are used for their parents' funding purposes only and their senior unsecured debt ratings are aligned with those of their parents. They are sensitive to the same factors as their respective parents' senior unsecured debt.

The rating actions are as follows:

ANZ Bank New Zealand Limited (ANZ NZ):
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 ANZNZIL affirmed at 'AA-'; and
Senior unsecured rating for short-term notes issued through ANZNZIL affirmed at 'F1+'.

ASB Bank Limited (ASB):
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 ASBFL affirmed at 'AA-'; and
Senior unsecured rating for short-term notes issued through ASBFL affirmed at 'F1+'.

Bank of New Zealand (BNZ):
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-'; and
Senior unsecured rating for long-term notes issued through BNZIFL affirmed at 'AA-'.

Westpac New Zealand Limited (WNZL):
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'; and
Senior unsecured rating for long-term notes issued through WSNZL affirmed at 'AA-'.