KiwiBank faces marginally lower funding costs as mortgage competition rises

KiwiBank, the state-owned lender, is likely to face marginally lower funding costs as mortgage competition heats up, following an improved credit rating by international ratings agency Fitch Ratings.

The bank refused comment on Fitch's upgrade to a AA rating with a positive outlook from a AA rating with a stable outlook, saying it consistently provides no response to ratings from any of the three agencies, Fitch, Moody's Investors Service and Standard & Poor's, when they are released.

The latest Fitch report on the 2015 outlook for New Zealand banks included a list of the current ratings which are assigned to businesses and sovereigns to provide investors with an indication of their credit worthiness. KiwiBank has the highest rating of all banks operating in New Zealand under both Fitch and S&P and the same as the big four Australian-owned retail banks under Moody's.

KiwiBank is the fifth largest bank in New Zealand with 840,000 customers, of which only 385,000 are considered main bank customers representing a 10.7 percent market share. It had a residential mortgage book of $13.7 billion in the year to June 30, rising to $13.9 billion as at Sept. 30, according to the bank's disclosure statements.

Fitch analyst Andrea Jaehne said the rating change matches the AA positive outlook sovereign rating it assigned last July to the New Zealand government, the ultimate owner of KiwiBank through its state-owned enterprise parent, New Zealand Post. She said the agency took into consideration what support KiwiBank was likely to get under that ownership when setting the bank's new rating.

The bank received a $40 million injection of new equity from its parent during last year after raising $100 million through a capital note issue. The bank faced higher capital requirements due to increased regulatory requirements set by the Reserve Bank, and is spending a further $100 million on infrastructure and upgrading its banking systems. KiwiBank chief executive Paul Brock said last year he expected future capital needs to be funded from increased profitability.

David Tripe, from Massey University's Centre for Banking Studies, said the rating change could make a marginal difference to KiwiBank's wholesale funding costs offshore. That could directly trickle through to the bottom line or the bank could decide to be less aggressive on what it pays for retail deposits or be more aggressive on lowering mortgage rates to gain market share, he said.

KiwiBank opened what is tipped to be a new mortgage lending war with a cut to its two-year fixed interest rate to 5.55 percent from 5.75 percent earlier this week. It's also offering a $2015 cash incentive for all new home lending above $100,000 with a minimum 20 percent equity.

The Bank of New Zealand responded today with a drop in its three-year fixed home loan rate to 5.59 percent from 5.99 percent. Other banks are expected to follow suit which is likely to reap homeowners significant savings on their interest repayments.

Mid-January is traditionally a time when the home loan market hots up following a BNZ-led mortgage war several years ago which means many fixed-interest rate loans fall due about now.

About 72 percent of borrowers are on fixed rate mortgages although 57 percent are on terms of less than two years, says the latest Fitch global outlook on housing and mortgages. It expects more borrowers to fix their mortgage rates this year, taking the fixed-rate proportion of total mortgage lending to above 80 percent.

(BusinessDesk)