Fitch affirms ASB Bank at 'A+'; outlook stable
Fitch Ratings has affirmed ASB Bank Limited's Long-Term Local- and Foreign-Currency Issuer Default Ratings (IDR) at 'A+' with a Stable Outlook as part of the annual review of New Zealand's four major banks. The review does not encompass ASB's covered bond issuance.
The affirmation of ASB's IDRs and Support Rating reflects Fitch's assessment that there continues to be an extremely high likelihood of support from Commonwealth Bank of Australia (CBA, A+/Stable), the bank's
Australian parent, if required.
Fitch believes ASB is a key and integral part of the CBA banking group, with a low risk of sale and strong integration across management, risk frameworks and internal systems. ASB's profitability also contributes to CBA's diversified revenue sources. The prospect of support is bolstered by the strong linkages between the Australian and New Zealand banking regulators, which Fitch believes will work together to ensure the stability of both financial systems.
ASB's Viability Rating is supported by its strong franchise in New Zealand, especially in Auckland's residential mortgage market. This allows for a simple business model and underpins the bank's financial performance. ASB is New Zealand's third-largest bank by total assets and is likely to maintain its strong market share, benefiting from its large distribution channels and ongoing investments in technology and digital capabilities.
Fitch has revised the factor outlook on ASB's operating environment to stable, from negative, to reflect New Zealand's improved economic conditions. The country has been relatively successful in handling the Covid-19 pandemic, which allowed its economy to recover strongly from the pandemicinduced recession in 1H20. This has led to an upward revision of our forecasts of the economy; we now expect GDP to expand by 4.5% in 2021. However, there is still downside risk to this forecast, possibly caused by a steep increase in virus cases, although the risk has reduced significantly compared with early 2020.
Fitch believes ASB's asset quality will be supported in the medium-term by low interest rates and the country's stronger economic conditions than initially expected. It also reflects the bank's conservative underwriting standards. However, a modest deterioration in metrics is likely over the next 12 months as pandemic-related customer support measures are removed. Downside risk to our assumptions for asset quality have reduced significantly compared with last year, leading us to revise the factor outlook to stable, from negative.
Profitability should improve in FY21 on lower impairment charges. We have revised the profitability factor outlook to stable, from negative, as we believe ASB's core profitability metric will remain consistent with its current factor score of 'a+' over the next two years. Profitability has been better than at domestic peers due to ASB's stronger cost/income ratio and net interest margin. Operating expenses may continue to rise due to investments in regulatory compliance and risk management. However, this could be partly offset by improved efficiency from streamlining work flows and system upgrades.
We expect ASB's capitalisation to continue to improve over the next few years, although ratios may decline in 2022 when the regulator implements a capital floor and increases the scalar. Dividend restrictions introduced by the Reserve Bank of New Zealand in 2020 have resulted in solid capital accumulation, although a classification error led to an increase in risk-weighted assets in 1H21, negatively affecting the bank's capital ratios.