Fitch Upgrades Big Four NZ Banks to Positive Amid LAC Rule Changes

Fitch Ratings has revised its credit ratings on New Zealand's big four banks to positive from stable, citing incoming Reserve Bank regulatory capital requirements. The new rules will require the banks to issue loss-absorbing capacity (LAC) instruments to their Australian parent banks by late 2028.

This change is expected to bolster the kiwi subsidiaries' position within their Australian parent groups in the event of bank distress. Fitch believes that LAC can act as a cushion of equity and debt instruments, allowing banks to absorb unexpected losses without failing or needing a bailout.

The Reserve Bank's new capital framework mandates internal issuance of LAC instruments to the Australian parents of the New Zealand major banks, supporting a single-point-of-entry approach to resolution. This means that if one of the New Zealand subsidiaries were to fail, it could potentially access the LAC buffers raised by its parent bank.

ASB's AA- rating is higher than the A+ ratings of ANZ NZ, BNZ, and Westpac NZ due to its parent, Commonwealth Bank of Australia, having an AA rating from Fitch. The Reserve Bank says it'll consult on an exposure draft specifically for the LAC requirements next year.