NZ Post drags down Kiwibank credit rating outlook   1 Feb 2012

Paul McBeth

State-owned Kiwibank has had the outlook on its credit rating dragged down by the “ongoing structural decline” of parent New Zealand Post’s delivery business, according to Standard & Poor’s.

The rating agency affirmed Kiwibank’s ‘AA-minus‘ credit rating, but put it on a negative outlook, giving it a one-in-three chance of a downgrade over the next two years, aligning the bank with its parent company. S&P said the ratings would mirror each other “unless there is a significant dilution or withdrawal of the guarantee provided by New Zealand Post.”

The affirmed rating reflects Kiwibank’s “moderate” risk position that recognises its “high growth and its adequate-but-less-developed risk management capability,” S&P said. The bank’s asset quality compared favourably with its peers and is sound by global standards. Still, impairments shot up in the last financial year because of its exposure to Christchurch and changes to its credit provisioning policy.

“We believe that there are no significant changes in rating factors, other than the change in the outlook of the bank’s parent, that affect our rating assessment of Kiwibank,” S&P credit analyst Nico de Lange.

S&P affirmed NZ Post’s AA-minus rating and put it on negative outlook, saying the decline in standard letter delivery business will make the state-owned enterprise “will become increasingly reliant on more competitive earning streams such as parcel and express courier deliveries, which will place further pressure on its business risk profile.”

NZ Post last week increased its parcel rates and introduced rural delivery charges to cover rising fuel costs, and has had to contend with declining earnings over the past couple of years as people eschew traditional postal services for electronic delivery.

Kiwibank was flagged as a “significant contingent liability for the group” and is a weight on NZ Post’s credit quality. The bank’s borrowings and mainly at-call deposits have shorter maturities than its loan book, though that’s mitigated by its holdings of good quality liquid investments.

S&P said the bank had a moderate business position, with its exposure to potential competitive pressure from the big four Australian-owned banks, but is looking at ways to tap into NZ Post’s distribution networks to grow its operations.

The bank had strong capital and earnings factors with its risk-adjusted capital ratio able to accommodate growth, and a satisfactory capital structure.

“Although Kiwibank generates sufficient earnings to cover our estimation of normalised losses (the three-year average earnings buffer is about 136 basis points), the bank’s key earnings metrics are weaker relative to peers, largely due to its lower net interest income level,” S&P said.

The bank’s funding was deemed to be “average” owing to its rapidly growing retail deposit base, supplemented by wholesale borrowing, and liquidity was “adequate.”

Last month, Kiwibank bought Gareth Morgan Investments, including its KiwiSaver business, for an undisclosed amount as it seeks to broaden its exposure to wealth management.


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