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 Outlook on their respective Long-Term Issuer Default Ratings (IDR) remains Stable. 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 have not been taken into consideration in this peer review.

KEY RATING DRIVERS
IDR, Support Rating, Senior Unsecured 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 focus on core customers and products which align with their parents' strategies. As a result, the majors have consistently contributed to the groups' objectives. The strong likelihood of support is reinforced by the regulatory linkages between Australia's and New Zealand's authorities. We expect both authorities to work closely to ensure the stability of each other's financial systems.

The Outlooks on the four 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 majors share similar rating drivers, reflecting their comparable characteristics. The affirmation of their Viability Ratings (VR) reflects their conservative risk appetite and robust risk-management practices, as well as their strong domestic franchises and consistently healthy operating profitability. The VRs also take into consideration Fitch's expectation of some asset-quality deterioration in 2016 within the rural exposures as a result of prolonged low dairy prices. This is likely to lead to slowing growth in operating profit, although most profitability metrics should remain stronger than international peers.

The banks' risk-management frameworks and tight risk controls are tempered slightly by a level of industry concentration particularly to residential mortgages, commercial real estate and agriculture. However, underwriting standards appear sound and are regularly adjusted to fit the operating and regulatory environment.

Fitch expects some deterioration in asset quality, mainly as a result of the persistent low global dairy prices which have resulted in a weak payout to farmers from Fonterra Co-operative Group Limited (Fonterra, A/Stable). The 2014/2015 payout of NZD4.80 per kg milk solid was significantly lower than the historical average payout of NZD6.00 per kg milk solid - which was a reference for the banks' borrowing capacity and servicing assessment. Fonterra's 2015/2016 payout forecast of NZD4.60-4.65 kg per milk solid means the payout will remain below the historical average for a second season, placing pressure on the cash flow of many farmers. All the majors monitor their agriculture exposures carefully, and would consider supporting their rural customers whose businesses are considered viable. As a result, we expect an increase in agriculture exposure as farmers call on their working-capital facilities. However, we also expect a rise in impaired facilities. Losses are historically low despite the cyclicality of the business, but could increase sharply if asset prices were to fall.

Risks in mortgage books appear adequately managed, particularly as interest rates remain below historical averages and price inflation accelerated in 2015. The majors add buffers to market rates when assessing a borrower's capacity to service a loan. The introduction of the macro-prudential tools in October 2013 have resulted in a considerable reduction in mortgages with loan/value ratios (LVR) exceeding 80%. The adjustments to these measures conducted by the RBNZ in November 2015, which include an additional LVR limit on investment mortgages in Auckland, may lead to a further decline in higher-LVR mortgages, although the speed of decline may decelerate. The recent reduction in higher-LVR mortgages should mitigate the potential risk to banks' asset quality in the event of a substantial downturn in property values following a sharp increase in house prices during 2015 - particularly in Auckland.

The majors have considerable exposures to Auckland, although their higher-LVR mortgage exposures in this market are smaller relative to other regions, and their portfolios reflect the distribution of New Zealand's population. We believe the risks to deteriorating mortgage asset quality are moderate; and a sharp increase in interest rates and unemployment which would trigger a correction of house prices, would be required for meaningful losses to emerge.

Early indications of Christchurch's earthquake on 14 February 2016 show there is limited structural impact, which means the asset quality impact for the banks should be minor. However, we will continue to assess the impact on the banks' loan books as more information becomes available.

Fitch expects the majors to maintain their improved funding and liquidity positions. A continued focus on longer-term wholesale funding and improving the quality of deposits is likely in 2016. The banks should remain reliant on offshore wholesale funding markets in 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. The majors continue to reduce their inter-group funding, partly as a result of new inter-group exposure restriction introduced by APRA in 2015.

The majors have strong operating profitability; with some of the widest net interest margins and most efficient cost-management relative to international peers. However, we expect the growth of operating profit to slow in 2016 as a result of an increase in loan-impairment charges related to the banks' agriculture exposures, strong ongoing competition in the mortgage market, and the rising funding costs reflective of the global market volatility.

The majors' capitalisation remains sound relative to most international peers, as 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 higher risk-weighting requirements on residential mortgages and strict capital rules - which have been tightened progressively over the past four years. On un-risk-weighted capital ratios, the majors compare well with most international peers. Internal capital generation should continue to benefit from healthy operating profitability.

Almost all of the majors' operations are in New Zealand, where we expect GDP growth to stabilise at 2.5% in 2016. Weaknesses in the agriculture sector and the peaking of the Christchurch rebuild will have a negative impact. However, strong net immigration should support the construction industry while tourism could offset some of the agriculture challenges. Nevertheless, housing affordability - especially in Auckland - has weakened further in 2015. This, together with an increase in household debt, could place pressure on households. New Zealand's household debt/disposable income ratio has risen to 159%, making households susceptible to higher unemployment and/or interest rates.

SUBSIDIARY AND AFFILIATED COMPANY
The majors issue a portion of their wholesale funding through their 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). 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 debt instruments are guaranteed by their parents.

RATING SENSITIVITIES
IDRS, Support Rating and Senior Unsecured Debt
The majors' IDRs and Outlooks are equalised with those of their respective parents. Any change in the parent ratings are likely to be reflected in the ratings of the majors. The Support Ratings and IDRs may be downgraded should Fitch change its view of the majors' core subsidiary roles and/or amendments are made to the cross-border regulatory approach by the authorities of both countries.

VR
The majors' VRs have similar rating sensitivities, reflecting their similar rating drivers. The VRs are sensitive to increased risk appetite, as reflected in weaker risk controls and underwriting standards. These factors, combined with a major deterioration in the operating environment - potentially triggered by a sharp slowdown in New Zealand's major trading partners, Australia or China - could contribute to sharper asset-quality deterioration than Fitch would expect during a normal economic cycle. This could also lead to a substantial weakening in capitalisation. 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 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 majors' funding subsidiaries are sensitive to the same factors as their respective parents' IDRs.

The rating actions are as follows:

ANZ Bank New Zealand Limited (ANZNZ):
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-'.