Fitch Ratings has affirmed ANZ Bank New Zealand Limited's (ANZNZ) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'A+', Short-Term Foreign- and Local-Currency IDRs at 'F1', Shareholder Support Rating (SSR) at 'a+' and Viability Rating (VR) at 'a'.

The Outlook on the Long-Term IDRs is Stable.

Key Rating Drivers

Support Prospects: ANZNZ's SSR and IDRs reflect Fitch's assessment of a very high likelihood of support from the bank's Australia-based 100% owner, Australia and New Zealand Banking Group Limited (ANZ, A+/Stable/a+), if required. We align ANZNZ's Long- and Short-Term IDRs and our Outlook with the IDRs and Outlooks assigned to ANZ as a result.

Integral Subsidiary: ANZNZ's SSR reflects that it is a key and integral part of ANZ, offering products and services in the group's core market, New Zealand. A sale is very hard to conceive and would noticeably alter the overall shape of ANZ, while any default of ANZNZ would constitute a huge reputational risk for ANZ, damaging its franchise. Fitch expects the Australian and New Zealand banking regulators to allow support to flow as required.

Stable Operating Environment: Fitch expects the operating environment to be broadly stable for New Zealand banks over the next two years despite our forecast for a mild recession in 2023. This underpins the stable outlook on our operating environment score of 'a', which is below the 'aa' category score implied by Fitch's criteria to reflect the high household debt in New Zealand.

Market Position Underpins VR: ANZNZ's VR, which is in line with its implied VR, is supported by its large domestic market position. This allows for a simple business model, which underpins the financial profile. The 'a+' business profile score is above the implied 'bbb' category score to capture the strong market position. ANZNZ is New Zealand's largest bank, with market share of more than 25% for most products.

Robust Risk Management: Credit risk, stemming primarily from the loan portfolio, remains ANZNZ's main risk and we believe this is managed well. Management of market and non-financial risks also appears well managed, benefiting from both regulatory oversight and access to expertise and policies from the parent.

Manageable Asset-Quality Deterioration: We expect ANZNZ's stage 3 loan/gross loan ratio to increase to just above 1% by the end of the financial year to 30 September 2024 (FYE24), from 0.5% at FYE22, as high inflation and rapid interest-rate hikes put pressure on some borrowers' repayment capability. Provisioning levels will probably fall as impaired loan balances rise, but high levels of collateral coverage in the loan portfolio should limit losses.

Profitability to Weaken: Slower loan growth, and higher impairment charges should offset a rise in the net interest margin in FY23, resulting in a fall in the operating profit/risk-weighted assets (RWA) ratio. The ratio will also be affected by an increase in RWAs because of implementation of the new capital framework in New Zealand - this will have a one-off impact in FY23 and will not be repeated in FY24. We expect the operating profit/RWA ratio to be about 2.5% in both FY23 and FY24.

Regulatory Capital Ratios to Fall: The implementation of the increased scalar and subsequent increase in risk density is likely to result in a decline in ANZNZ's common equity Tier 1 (CET1) ratio in FY23. We expect the ratio to then increase in FY24 to about 12.4% as the bank works towards the final implementation date for the new framework in mid-2028. The framework is more conservative than global rules, and we take this into consideration when assigning the factor score at 'a', above the implied 'bbb' category.

Stable Funding: We expect slower deposit growth to be offset by a reduction in loan growth in FY23, resulting in a stable loans/customer deposits ratio for ANZNZ. The ratio was 113% at FYE22. Liquidity is well managed, with the bank reporting regulatory liquidity ratios well in excess of minimum requirements.

Rating Sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:

IDRs AND SSR

Any downgrade of ANZ's IDRs is likely to result in a downgrade of the SSR and IDRs assigned to ANZNZ; see Fitch Affirms Australia and New Zealand Banking Group at 'A+'; Outlook Stable, published on 21 March 2023, for the key drivers and sensitivities of ANZ's ratings.

The IDRs and the SSR may also be downgraded should we change our view on ANZNZ's importance to ANZ. This could be reflected in the partial or full sale of ANZNZ or a decision to significantly scale back operations within New Zealand. Weakening co-operation between authorities in Australia and New Zealand may indicate a reduced ability for ANZ to provide support in a timely fashion and put pressure on the ratings. However, neither of these scenarios is likely in our view.

VR

The VR could be downgraded if deterioration in the economic environment results in a combination of:

the four-year average of the stage 3 loans/gross loans ratio increasing above 1.5% (FYE22: 0.6%) for a sustained period;

the four-year average of the operating profit/RWA ratio falling consistently below 2.0% (FYE22: 2.5%);

the common equity Tier 1 capital ratio declining below 10.5% without a credible plan to return to above this level (FYE22: 12.4%).

Factors that could, individually or collectively, lead to positive rating action/upgrade:

IDRs AND SSR

An upgrade or revision of the Outlook on ANZ's IDRs would be reflected in ANZNZ's SSR and IDRs or the Outlook, as long as there is no change to ANZ's propensity to support ANZNZ.

VR

An upgrade of the operating environment score for New Zealand banks to 'a+', possibly to reflect reduced risks on household leverage within the system, would most likely be a prerequisite for an upgrade of ANZNZ's VR. An upgrade of the VR would also require that ANZNZ maintain its strong business profile in combination with a sustained improvement in its asset quality, capital and funding metrics.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

ANZNZ's senior unsecured debt is rated in line with its IDRs, as per Fitch's Bank Rating Criteria.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

ANZNZ's senior debt ratings will move in line with ANZNZ's IDRs.

SUBSIDIARIES & AFFILIATES: KEY RATING DRIVERS

ANZNZ issues foreign-currency wholesale funding through its wholly owned subsidiary, ANZ New Zealand (Int'l) Limited (ANZIL). ANZIL is used for funding purposes only and is not rated by Fitch; Fitch only rates the debt that it issues. The debt ratings are aligned with ANZNZ's IDRs, as ANZNZ guarantees ANZIL's senior unsecured debt instruments and the guarantee ranks pari passu with ANZNZ's senior unsecured debt.

SUBSIDIARIES AND AFFILIATES: RATING SENSITIVITIES

The ratings of the guaranteed instruments issued by ANZIL would be downgraded if ANZNZ's IDRs are downgraded or upgraded if ANZNZ's IDRs are upgraded.

VR ADJUSTMENTS

The operating environment score of 'a' has been assigned below the 'aa' category implied score for the following adjustment reason: level and growth of credit (negative).

The business profile score of 'a+' has been assigned above the 'bbb' category implied score for the following adjustment reason: market position (positive).

The capitalisation and leverage score of 'a' has been assigned above the 'bbb' category implied score for the following adjustment reason: leverage and risk-weight calculation (positive).

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

Sources of Information

The principal sources of information used in the analysis are described in the Applicable Criteria.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Public Ratings with Credit Linkage to other ratings

ANZNZ's IDRs are equalised with those of its Australian parent, given our view of potential support from ANZ. The ratings of the senior debt issued by ANZIL are equalised with ANZNZ's IDRs, as the parent provides guarantees for these instruments.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of environmental, social and governance (ESG) credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

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