OREANDA-NEWS. Fitch Ratings has affirmed Kiwibank Limited's (Kiwibank) Foreign and Local Currency Long-term Issuer Default Ratings (IDRs) at 'AA' and 'AA+', respectively. The Outlook is positive. A full list of rating actions is at the end of this commentary. Today's rating action has no impact on the ratings of Kiwibank's covered bonds.

KEY RATING DRIVERS - IDRs, SENIOR DEBT AND SUPPORT RATINGS
Kiwibank's IDRs, senior debt and support ratings reflect Fitch's view that the bank is a core subsidiary of New Zealand Post (NZ Post) and is ultimately a wholly-owned enterprise of the New Zealand sovereign (Foreign Currency Long Term IDR: AA/Stable). The agency believes that in times of difficulty, there is an extremely high likelihood of support from the sovereign through NZ Post. Additionally, NZ Post provides an explicit unlimited guarantee for the bank's unsecured debt including customer deposits. Kiwibank accounted for 94% of NZ Post's assets and 71% of its net profit after tax at end-1H15.

The positive Outlook reflects the Outlook for the sovereign rating.

KEY RATING DRIVERS - VIABILITY RATING (VR)

Kiwibank's VR is reflective of its moderate franchise resulting in limited pricing power relative to the major banks. The bank holds about 4% total lending market share. Key operations focus on retail lending through the bank's branch network and outlets of New Zealand Post. The bank has entered a phase of less aggressive growth, resulting in a conservative risk appetite. Kiwibank's commercial exposures remain small as a proportion of total exposures relative to peers.

The bank's capital ratios on a risk-weighted and un-risk-weighted basis have continued to strengthen, further reducing the gap between its domestic peers, assisted by high internal capital generation. Fitch expects capitalisation to continue improving in the short to medium term although at a slower rate as the bank has commenced paying dividends to the parent.

Fitch believes asset quality is likely to remain stable in FY16, supported by the prevailing economic environment and reflective of the bank's strengthened underwriting standards and focus on residential mortgages. Kiwibank assesses loan serviceability at rates substantially above the prevailing variable rate, mitigating the risk of sharp increases in lending rates.

Fitch believes Kiwibank's operating efficiency will improve in the medium term as a result of its technology investments and operational restructuring. Earnings could be susceptible to market competition and the easing interest rate cycle. Growth in commission and fee revenue from the sale of insurance and wealth management products remains healthy and will support longer term growth prospects.

RATING SENSITIVITIES
IDRs, SENIOR DEBT AND SUPPORT RATINGS

Kiwibank's IDRs, senior debt and support ratings are sensitive to changes to NZ Post's and the Sovereign's Long-Term Foreign and Local Currency IDRs. The willingness and ability of these entities to support Kiwibank is also a key consideration.

RATING SENSITIVITIES - VR

Kiwibank's VR could be pressured if its risk appetite were to be compromised to improve its company profile. This could result in weaker asset quality, earnings and capitalisation.
A notable improvement in the bank's capitalisation would be required for positive movement in the VR which does not appear likely in the short term.

The rating actions are as follows:

Kiwibank Limited:
Foreign Currency Long-Term IDR affirmed at 'AA'; Outlook Positive;
Foreign Currency Short-Term IDR affirmed at 'F1+';
Local Currency Long-Term IDR affirmed at 'AA+'; Outlook Positive;
Local Currency Short-Term 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+'; and
Commercial Paper Programme affirmed at 'F1+'.