Tuesday 24th September 2019
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International ratings agency Standard & Poor's has raised UDC Finance's credit rating a notch because of its view that the economic risks facing New Zealand's financial system have reduced and because of UDC's improved capital position.
S&P now rates UDC as 'BBB+' from 'BBB' previously, putting it two notches above the minimum investment-grade rating, but it notes that its owner, ANZ Bank, continues to review its ownership and that divestment is "the most likely downside scenario over the next two years."
Barring that, S&P puts UDC's ratings outlook at stable. The ratings agency's stand-alone rating of UDC is now 'BBB', with the actual rating a notch higher "to reflect our view that limited support from UDC's ultimate parent … would be available, if needed."
"Our ratings on UDC reflect its current ownership structure and business and financial profiles," the ratings agency says.
"Nevertheless, we note that ANZ has been considering options to divest its ownership of UDC. A change in ownership is likely to weaken our rating on UDC in several ways, including a weakening in the finance company's business and financial profiles," it says.
"For example, if the funding facility from ANZ Bank New Zealand is discontinued as a result, or if the new shareholder plans to reduce the capital level."
Back in 2016, before ANZ said it was considering divesting UDC, the finance company's S&P rating was 'AA-', which is ANZ's current rating, and then when it was known the proposed buyer was China-based HNA Group, S&P downgraded the rating further, warning it could go as low as 'B+' if the sale completed.
In 2017, the Overseas Investment Office rejected HNA as a purchaser.
ANZ then said it was looking at floating UDC on the NZX but then ruled that out in October last year.
S&P says UDC's capital position has improved with its risk-adjusted capital ratio moving from 17.9 percent at March 31 this year to a forecast 18.5-19.5 percent over the next two years.
ANZ says that because UDC has been growing fast, the finance company hasn't paid a dividend since the year ended September 2015 to help provide capital to fund that growth.
"As a result, the capital held by UDC has steadily increased from $365.5 million at Sept. 30, 2015 to $577.4 million at March 31, 2019," the bank says.
Using the methodology in the regulations governing non-bank deposit takers, that means UDC's capital ratio has improved from 9.4 percent to 10.6 percent over that period, ANZ says.
Earlier this month, S&P said slowing house price growth in New Zealand over the past two years has reduced the risks facing banks and non-bank financial institutions.
"Consistent with our expectations, house price inflation in New Zealand continues to moderate to about 3 percent in the 12 months to June 30, 2019, down from almost 15 percent in 2016 – and 9.9 percent a year over 2012-2016," the ratings agency said.
"In our view, the economic risks are balanced. Lower net migration levels, easing business confidence, the ongoing ban on non-residents purchasing existing properties, tightened tax measures for property investors and a potential slowdown in lending under the Reserve Bank of New Zealand's proposed capital requirements will weigh on property prices," it said.
The Reserve Bank has proposed raising the minimum risk-weighted capital the four major banks must hold from 8.5 percent to 16 percent while the smaller banks would have to meet a slightly smaller minimum ratio of 15 percent, phased in over a five-year period.
The central bank is scheduled to make its final decision in November.
S&P noted a number of factors which could boost house prices, from low interest rates to capacity constraints in the construction industry.
Nevertheless, "in our view, the slower house price growth has moderately reduced the likelihood of a severe house price correction and with it the potential losses that banks in New Zealand may face in such a scenario," the ratings agency said.
It doesn't expect house price inflation to accelerate again to the "lofty levels" seen in 2015 and 2016.
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