New Zealand Bank Credit Ratings - The Definitive Guide for Every New Zealander

Our guide provides an in-depth understanding of New Zealand bank credit ratings, their significance, credit rating frameworks, essential facts, rating scales, and frequently asked questions, empowering every New Zealander to make well-informed investment decisions.

Updated 26 September 2023

Summary:

The Reserve Bank of New Zealand (RBNZ) defines a credit rating as an independent evaluation of a financial institution or company's ability and willingness to repay its debts, essentially measuring its financial strength and creditworthiness.
Independent rating agencies like Standard & Poor's, Fitch Ratings, and Moody's Investors Services assign credit ratings.
These ratings are expressed alphabetically, with higher ratings (e.g., 'AAA') indicating a lower chance of default and lower ratings (e.g., 'C') suggesting a higher risk of default.
Credit ratings help investors determine the likelihood of a financial institution's default and whether the risk is worth the potential return on investment.
Credit ratings also apply to financial assets. For example, high-yield, non-investment-grade, speculative-grade, or "junk bonds" are rated below investment grade. These bonds carry a higher risk of default but offer higher yields (e.g. interest rate) to attract investors. Such poor credit ratings are more commonplace outside of New Zealand - junk bonds are rarely issued locally.

Know This: Rating agencies consider various financial metrics, industry-related factors, and the quality of management and internal processes when assessing an organisation's financial strength. Therefore, while credit ratings provide valuable risk indicators, investors should not rely solely on them to make investment decisions.

To explain credit ratings and how they apply to banks, are guide covers:

Important: Our guides focuses on credit ratings for banks, which is critical for investor confidence. However, we discuss credit ratings for non-banks, government debt and other related matters. As this is the first edition of our guide, if you have a question you'd like answered, please contact our research team.

A brief background on credit ratings:

The 2008 Global Financial Crisis significantly impacted New Zealand's credit rating system, leading to new regulations.
Before the crisis, credit ratings were not mandatory for banks, but the Reserve Bank of New Zealand (RBNZ) later required all registered banks to have credit ratings from approved agencies.
These changes aimed to improve transparency, risk management, and investor confidence. Since then, credit ratings have become crucial in the financial sector, with ongoing monitoring and refinement by the RBNZ and other regulators to address evolving risks and challenges.
Ratings continue change - this RNZ article from 2021 shows how positive economic conditions supported a raise in bank ratings.

MoneyHub Founder Christopher Walsh shares his comments around investing and credit ratings:

"New Zealand has 10+ banks, all with different credit ratings. While ANZ, Westpac and the other major players hold A ratings, SBS, Heartland Bank and the Co-operative Bank are rated BBB. Considering credit ratings as part of your investment decision-making process is important, given if a bank goes under, you become a creditor along with everyone else.

Some tips can help you minimise the risks of investing in poorly rated deposits:

Diversify your investments - don't put everything with one bank - the risk is too greater for the small differences in interest rates.
Monitor credit ratings over time - while a significant downgrade would make big news in New Zealand, staying aware of credit rating updates and adjusting your investment strategy accordingly will be valuable.
Look beyond credit ratings - consider other factors, such as the financial institution's financial performance (e.g. is it profitable?) and overall reputation (is it in the news for the wrong reasons?) when evaluating investment opportunities. You should also stay informed about the economic and regulatory environment and consider how these factors might impact your investments.

When the above tips are considered and actioned, you can invest confidently and remain diversified".

Christopher Walsh
MoneyHub Founder

New Zealand's Credit Rating Framework Explained

The Reserve Bank of New Zealand is the primary regulator of banks, non-bank deposit takers, and insurance companies. The Banking (Prudential Supervision) Act 1989 requires registered banks to obtain and maintain a credit rating applicable to their long-term, senior, unsecured obligations payable in New Zealand dollars. Banks can obtain credit ratings from Standard & Poor's, Moody's Investor Service, or Fitch Ratings and must publish their credit ratings in six-monthly disclosure statements. An example from Westpac can be found here which lists the ratings from all three agencies. An example of Fitch's Westpac rating (issued in 2022) can be seen here.

Credit ratings are not guarantees of a bank's future safety. For example, even an 'AAA' rated bank has an approximately 1 in 600 chance of default over five years. Ratings are periodically revised, but they're designed to provide a medium-term perspective on an institution's financial strength and don't respond to specific events or market volatility.

When making investment decisions, such as where to make a term deposit or open an on-call account, the credit ratings of each bank do need to be considered.

More details:

The Reserve Bank of New Zealand covers credit ratings in detail.

Credit Ratings Must-Know Facts

To help explain credit rating further, we publish five must-know facts that outline what's important.

1. Credit ratings are required for registered banks in New Zealand.
Under section 80 of the Banking (Prudential Supervision) Act 1989, the Reserve Bank of New Zealand requires all registered banks to obtain and maintain a current credit rating for their long-term, senior, unsecured obligations payable in New Zealand dollars. This requirement ensures that investors have access to a standardized measure of risk when comparing different banks and investment opportunities, such as term deposits.

2. Internationally recognized agencies issue New Zealand credit ratings.
Standard & Poor's, Fitch Ratings, and Moody's Investors Services are the primary credit rating agencies issuing ratings for New Zealand financial institutions. These independent agencies evaluate the creditworthiness of banks and other financial institutions, which can help investors make more informed decisions when selecting term deposits or other fixed-income investments.

3. Higher credit ratings indicate lower risk.
A higher credit rating (e.g., 'AAA') signifies a lower risk of default and suggests that the financial institution is more creditworthy. Conversely, a lower rating (e.g., 'C') indicates a higher risk of default. Therefore, when choosing a term deposit, investors should consider the bank's credit rating to assess the risk associated with the investment.

4. Credit ratings are not guarantees of future performance.
While credit ratings provide a useful indication of a bank's creditworthiness, they do not guarantee its future performance or safety. Even a bank with a high credit rating has a small chance of defaulting on its obligations. Therefore, credit ratings are only one factor among many when evaluating term deposit options.

5. Credit ratings can change over time.
Credit ratings are periodically revised to reflect changes in a financial institution's financial strength and overall risk profile. As a result, investors should monitor credit ratings for any significant changes that might affect their term deposit investments.

With the above facts in mind, we list the standardised rating scale below, as well as current ratings for 15+ New Zealand banks:

Standardised Rating Scale - S&P vs Moody's vs Fitch

	Description	S&P Scale	Moody’s Scale	Fitch Scale	Approx probability of default over 5 years*
Capacity to make timely payment	Extremely strong	AAA	Aaa	AAA	1 in 600
Capacity to make timely payment	Very strong	AA	Aa	AA	1 in 300
Capacity to make timely payment	Strong	A	A	A	1 in 150
Capacity to make timely payment	Adequate	BBB	Baa	BBB	1 in 30
Vulnerability to non-payment	Less vulnerable	BB	Ba	BB	1 in 10
Vulnerability to non-payment	More vulnerable	B	B	B	1 in 5
Vulnerability to non-payment	Currently vulnerable	CCC	Caa	CCC	1 in 2
Vulnerability to non-payment	Currently highly vulnerable	CC	-	CC	-
Vulnerability to non-payment	Default	D	C	D	-

New Zealand Bank Credit Ratings - April 2023

Retail Bank	Standard & Poor's Rating	Fitch Rating	Moody's Rating
ASB Bank	AA-	A+	A1
ANZ New Zealand	AA-	A+	A1
BNZ	AA-	A+	A1
Heartland Bank	-	BBB	-
Kiwibank	-	AA	A1
Rabobank	A+	A+	Aa2
Southland Building Society	-	BBB	-
The Co-operative Bank	-	BBB	-
TSB Bank	-	A-	-
Westpac	AA-	A+	A1

Alternative and Investment Bank	Standard & Poor's Rating	Fitch Rating	Moody's Rating
Bank of China	A	A	A1
Bank of India	-	BBB-	-
China Construction Bank	A	A	A1
Citibank	A+	A+	Aa3
JPMorgan Chase	A+	AA	Aa2

There are three BBB-rated banks - can I trust them?

Heartland Bank, SBS and the Co-operative Bank all have BBB credit ratings. This is considered an investment-grade rating, albeit at the lower end of the scale. It indicates that the financial institutions with this rating have an adequate capacity to meet their financial obligations. However, this rating also suggests that they may be more susceptible to economic downturns or adverse changes in business conditions compared to higher-rated entities.
A BBB rating doesn't necessarily make them "bad" banks, but it indicates that they carry a higher risk of default or financial distress than banks with higher credit ratings.
As an investor or customer, it's essential to consider this information alongside other factors, such as the bank's financial performance, products and services, and overall reputation, before making any decisions about where to invest (in the case of term deposits).

How often are credit ratings updated?

Credit ratings are periodically revised to reflect a financial institution's financial strength, creditworthiness, and overall risk profile changes. The frequency of updates varies depending on the rating agency and the specific circumstances of the rated institution. Our research team ensures this guide is updated when ratings change.

What are the potential consequences of a credit rating downgrade for a bank?

A credit rating downgrade can have various negative consequences for a bank. For example, it may result in higher borrowing costs, reduced access to capital markets, a loss of investor confidence, and a decline in the bank's share price. A downgrade may also prompt the financial institution to adopt more prudent business practices to avoid further downgrades.

What measures can New Zealand banks and other financial institutions take to maintain or improve their credit ratings?

There are many ways to do it, and the assessments are detailed. Generally, adopting prudent business practices, effectively managing risks, maintaining strong capital and liquidity positions, and demonstrating good corporate governance help to improve credit ratings. Regularly reviewing and updating internal processes, risk management strategies, and overall business models can also help.

What is the relationship between credit ratings and interest rates?

Credit ratings influence the interest rates financial institutions offer borrowers and pay depositors. Generally, institutions with higher credit ratings can obtain funds at lower interest rates, which is considered less risky. Conversely, institutions with lower credit ratings may have to offer higher interest rates to attract investors willing to assume greater risk.

Frequently Asked Questions

Our guides focuses on credit ratings for banks, which is important for investing confidence. However, we discuss credit ratings for non-banks, government debt and other related matters. As this is the first edition of our guide, if you have a question you'd like answered, please contact our research team.

What are the main credit rating agencies?

Standard & Poor's, Fitch Ratings, and Moody's Investors Services are the main credit rating agencies. These independent agencies issue credit ratings for financial institutions and companies globally.

What is the Financial Markets Authority's (FMA) role in credit ratings?

The Financial Markets Authority (FMA) is a New Zealand government agency regulating financial markets. While it does not issue credit ratings, it provides information and resources related to credit ratings, including data about specific ratings to historical default rates.

Are credit rating agencies regulated in New Zealand?

While New Zealand law doesn't regulate credit rating agencies, they are subject to oversight by their home country regulators. Additionally, the Reserve Bank of New Zealand and the Financial Markets Authority monitor the activities of credit rating agencies and their impact on New Zealand's financial markets.

What is the difference between a corporate credit rating and an issue credit rating?

A corporate credit rating evaluates the overall creditworthiness of a financial institution or company (for example, a bank), while an issue credit rating applies to a specific debt issuance (for example, a bond).

What is the relationship between credit ratings and the New Zealand dollar?

Credit ratings can impact the value of the New Zealand dollar, as they reflect the country's perceived creditworthiness and financial institutions. Higher credit ratings can boost investor confidence, increasing demand for New Zealand dollars and a stronger currency. Conversely, lower credit ratings can have the opposite effect, decreasing demand for New Zealand dollars and potentially weakening the currency.

What role do credit ratings play in New Zealand's non-bank financial sector?

In addition to banks, credit ratings can also be assigned to non-bank financial institutions, such as insurance companies and non-bank deposit takers. These ratings help investors assess the risk associated with investing in these institutions and can influence their borrowing costs and access to capital.

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