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NZ regional bank profits may come under pressure amid competition from bigger Australian rivals

Thursday 24th October 2013

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New Zealand regional banks, which make up about 15 percent of the local market dominated by four large Australian lenders, may struggle to increase revenue in the coming year amid competition from their bigger rivals, Fitch Ratings says in a review of regional financial institutions.

The nation's regional lenders, including Kiwibank, Southland Building Society, Nelson Building Society, Wairarapa Building Society, TSB Bank, Heartland Bank and The Co-operative Bank, benefit from simple business models focused on accepting deposits from households and businesses and lending to fund residential mortgages, business loans and personal loans while avoiding riskier and more complex financial products, Fitch said in its report today titled 'Sticking to the Basics'.

Credit risk is mitigated by a generally conservative underwriting approach, despite increasing competition challenging profitability, Fitch said. New Zealand's banking industry is dominated by the local arms of Australian-based lenders including ANZ New Zealand, ASB Bank, Bank of New Zealand and Westpac Banking Corp.

"Competition in the New Zealand mortgage market continues to challenge the profitability of the regionals. Small relative market shares limit their ability to act as price-setters when competing for price sensitive business," Fitch analysts Andrea Jaehne, John Birch and Tim Roche said in the report.

"Competition, especially from the four majors, is likely to put pressure on revenue generation in 2013-2014 for most regional lenders. As a result, Fitch considers cost management and healthy asset quality key to increasing operating profit."

The regional banks' smaller scale, pricing power, greater risk concentrations and limited access to new capital generally constrain their ability to obtain higher credit ratings, Fitch said.

Fitch has assigned a stable outlook to all four regional banks rated in the report, including Kiwibank and the Southland, Nelson and Wairarapa building societies.

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