Kiwibank Ltd. Table Of Contents

Transcription

1 December 29, 2010 Kiwibank Ltd. Primary Credit Analyst: Derryl D'silva, Melbourne (61) ; Secondary Contact: Anna Hughes, Melbourne (61) ; Table Of Contents Major Rating Factors Rationale Outlook Peer Analysis Profile: A Small Retail Bank In Wellington Support And Ownership: Wholly Owned By NZ Post Strategy: To Maintain Strong Asset Growth Risk Management: Credit Losses Have Increased, But Still Support Rating Profitability: Earnings Profile Has Started To Improve Capital: Satisfactory Resources For Risk Profile 1

2 Major Rating Factors Strengths: Unconditional guarantee from New Zealand Post Ltd. Good retail-funding position Good management team Supportive risk-based capitalization ratios and good financial flexibility Counterparty Credit Rating AA-/Stable/A-1+ Weaknesses: High growth appetite has the potential to moderate earnings, capital, and asset quality Modest market position as business growth is dependent on being able to price competitively Unseasoned lending portfolio Difficult economic conditions is likely to pressure earnings with high provisions Rationale The ratings on New Zealand-based Kiwibank Ltd. (Kiwibank) are equalized with those on its parent, New Zealand Post Ltd. (NZ Post; AA-/Stable/A-1+), reflecting the benefit of NZ Post's unconditional guarantee, which covers all of the bank's senior obligations. The guarantee can be withdrawn at three months' notice, but creditors are protected by a "grandparenting" provision. Standard & Poor's Ratings Services views the New Zealand government as supportive of Kiwibank, although this support may vary with any change in government. We view Kiwibank's stand-alone credit profile as modest. The bank's sound credit loss record, good retail-funding position, supportive capitalization, and good financial flexibility underpin this opinion. Moderating factors include the bank's high growth appetite, which has the potential to moderate earnings, capital, and asset quality; modest market position as business growth is dependent on being able to price competitively; and modest profitability that could be pressured by high provisions. Although Kiwibank began its operations about eight years ago, the bank's sustained rapid asset growth has led to a substantial portion of its loan book being unseasoned, which moderates the bank's financial profile. About half of its customer loans were written in the past two to three years and so have not been sufficiently tested over a reasonable period of time. While asset quality pressures have been managed reasonably well, we believe that there could be greater pressure on credit costs, particularly the business banking portfolio, due to a difficult economic environment. Despite rapid annual growth, Kiwibank's operations lack sufficient scale and remain modest compared with major banks. A combination of a large contraction in margins due to strong competition for home loans and low-cost retail deposits, and relatively high provisions because of deteriorating macroeconomic conditions, has undermined Kiwibank's earnings in the last year and in the first quarter of fiscal At year-ended June 2010, core earnings decreased to NZ$61 million from NZ$68 million in the previous year. Kiwibank's earnings may be vulnerable to volatility, compared with more profitable and established local peers, particularly because profitability would depend on its ability to continue strong business growth on the back of Standard & Poors RatingsDirect on the Global Credit Portal December 29,

3 competitive pricing while maintaining good access to low-cost retail funds. Equally important for maintaining profitability are provisioning costs, which are likely to increase in fiscal 2011 because of ongoing difficult conditions in the New Zealand economy. While such an increase in provisions is likely to be high compared with previous years, ultimate profitability is expected to continue on the back of an improving net interest margin. Further, Kiwibank's risk-based capitalization is supportive of the rating, and the bank's flexibility to absorb unexpected operating risk losses is satisfactory. Management of capital is largely driven by the rate of growth in the balance sheet. Supporting our view on capital is that Kiwibank seeks to achieve its growth targets without any direct capital injection from the parent. Nevertheless, we believe that support from NZ Post would be forthcoming if required. The bank's financial flexibility is good, strengthened by the recent provision of an uncalled capital facility. Short-term credit factors The 'A-1+' short-term rating reflects NZ Post's guarantee and our view that Kiwibank's funding profile and liquidity position are good. The bank's funding profile is underpinned by a rapidly growing retail deposit base, and supplemented by wholesale, market-accessed, registered certificates of deposit (RCD), subordinated bond issues, and a sizeable government guaranteed bond issuance done in Recently, Kiwibank set up its inaugural Euro Commercial Paper (ECP) program, and is likely to access this market in This overall increase in wholesale funding saw customer deposits to total funding drop to 60.1% at June 2010 (69.4% at June 2009). The bank's liquidity profile (14% of total funding liabilities that are deposits plus borrowings) mitigates, to some extent, potential for financial stress in the near term. Also supporting liquidity is the bank's access to NZ$600 million of internal securitization, completed in Cash holdings and good-quality liquidity is supplemented by Kiwibank's access to the New Zealand wholesale funding markets via its registered certificate-of-deposit program. Outlook The stable outlook on Kiwibank reflects the outlook on its parent, NZ Post. The ratings on Kiwibank are likely to remain equated with those on NZ Post, unless there is a significant dilution in the guarantee provided by NZ Post. An improvement in Kiwibank's stand-alone credit profile will depend on the bank's ability to demonstrate an improvement in operating performance and the quality of its earnings. Equally important is that the bank's high growth appetite does not manifest itself in any weakening of its financial profile, which remains a rating strength. Also important is the bank's ability to manage strong asset-growth expectations, particularly in current difficult economic and credit conditions, without a material increase in credit risk. Conversely, a material deterioration of asset-quality parameters may weaken the bank's stand-alone credit profile. Peer Analysis There are no 'BB' rated bank peers in New Zealand. All banks are rated in the 'BBB' category. TSB Bank Ltd. (TSB) in New Zealand, and Australian building societies, including IMB; Heritage; and Wide Bay; are predominantly residential lenders, and are close peers. New Zealand-based finance companies UDC and MARAC Finance Ltd. (MARAC) are also relative peers in the rating category. In terms of business profile, most peers benefit from a strong niche presence in their markets, and a sound brand and business franchise. 3

4 A weakness in Kiwibank's credit risk profile compared with peers' is a relatively unseasoned loan portfolio that has grown rapidly. While asset quality (NPAs/gross loans) to date is adequate, the ongoing economic challenges in New Zealand could increase pressure on charge-offs. Some evidence of increased pressure is visible in the ratio of provisions to revenues. Kiwibank's aspiration to grow its business loan portfolio differentiates it from the identified peers. With predominantly retail funds, Kiwibank's funding profile is comparable with TSB's. However, Kiwibank is diversifying its funding mix (CD program, subordinated debt, ECP market), which compares with IMB's and Heritage's. Finance companies are predominantly debenture-funded, although MARAC and UDC benefit from access to a bank facility. Kiwibank's profitability is marginal and its net interest margins are not as strong as peers'. Return on assets and the cost base are unfavorable compared with peers', reflecting Kiwibank's rapid growth trajectory. Capital injections from NZ Post, and more recently retained earnings have supported Kiwibank's capital base, which is larger than TSB's, but on a risk-based-capitalization-ratio measure TSB's is better than all peers. Given Kiwibank's strong growth aspirations, its larger absolute capital base is required to maintain capitalization. Profile: A Small Retail Bank In Wellington Headquartered in Wellington, Kiwibank has a modest business position in our view. It is a small retail bank with about 4.6% market share of customer loans and 6.7% market share of deposits. While Kiwibank's products include credit cards, insurance products, and business banking loans, residential mortgage loans remain the dominant part of its business. At year-ended June 30, 2010, residential mortgage loans were 63% of its total adjusted assets, while the business-banking book (since 2004) accounted for about 19%. On the liabilities side, Kiwibank offers traditional term deposits and savings and transaction accounts, of which core customer deposits formed about 60% of total liabilities at end-june. Kiwibank also manages NZ Post's agency services, such as bills payment. At end-june, Kiwibank had a customer base of about 570,000. Kiwibank has grown rapidly since it started in 2002, primarily through a broad distribution platform and competitive pricing. Business growth and customer penetration, to date, are supported by leveraging the business partnership with NZ Post to extend the bank's product reach. Kiwibank has a unique advantage because it distributes its products through about 300 NZ Post shop outlets, which is its primary sales channel. Other distribution channels include a customer call center, ATMs, EFTPOS services, telephone banking, and the Internet. Kiwibank continues to expand its product offering and strengthen its scale of operations. Currently, the bank is focused on growing its life insurance and wealth management business by leveraging off its existing customer base and distribution network. Kiwibank also offers nonlife insurance products but this is through a white-label approach. Support And Ownership: Wholly Owned By NZ Post Kiwibank is wholly owned by NZ Post. It is a registered bank; regulated, and supervised by the Reserve Bank of New Zealand. The rating on Kiwibank is equated with that on its parent because NZ Post unconditionally guarantees full and timely payment on all of the bank's senior obligations. Kiwibank's outstanding subordinated bonds and preference Standard & Poors RatingsDirect on the Global Credit Portal December 29,

5 shares hybrid are not covered under this guarantee. However, Standard & Poor's continues to equate Kiwibank's issuer credit rating with that on NZ Post because Kiwibank's nonguaranteed debt is likely to remain well below 5% of the bank's total liabilities in the medium term. The guarantee can be terminated at three months' notice, according to the guarantee provisions. However, a grandfathering clause provides protection to creditors, who rely on the guarantee. Although Kiwibank's stand-alone credit profile is considerably weaker than that of NZ Post's postal business, this weakness has been factored into the credit rating on the NZ Post group. NZ Post maintains close oversight of Kiwibank's operations. The bank's board consists of three NZ Post board members, the NZ Post CEO, and three independent directors. Although a majority of the board members are from NZ Post, the bank is managed independently. Strategy: To Maintain Strong Asset Growth Kiwibank aims to maintain its strong asset growth--both organic and inorganic--using the bank's unique distribution network, competitive pricing, and ability to enhance product offerings. In our view, Kiwibank's strategy is achievable, but ultimate success will depend on the bank's ability to build scale by accessing competitively priced funding, and by managing credit and operating costs. The bank remains focused on its target market of middle-income retail customers. To maintain growth in its business-banking portfolio, Kiwibank plans to continue to target the small and midsize enterprise (SME) sector by identifying more business accounts through the NZ Post relationship. The bank's business-banking share of total assets increased to 19% at end-june 2010, from 10% in 2007, and is expected to increase further still. Over the long term, the bank is likely to expand its exposure to this segment, which will also help improve overall earnings prospects. In addition to strong asset growth, Kiwibank is looking to diversify its revenue sources. Kiwibank plans to generate its interest income almost entirely from residential mortgages and SMEs. However, it is targeting stronger growth in non-interest income, particularly fee income from its ATM roll-out, and its wealth management business. Kiwibank is also committed to make technology improvements to enhance its infrastructure capacity and operational excellence. Planned improvements include the modernization of its core banking platform, and the rebuilding of its Internet banking capabilities. Risk Management: Credit Losses Have Increased, But Still Support Rating Credit risk Kiwibank's credit losses and nonperforming assets (NPAs) have increased, but are still supportive of the rating, reflecting its exposure to low-risk residential mortgages, and good underwriting standards. However, the bank's strong growth ambitions, which are reflected in its rapid growth over the past five years, leave it with a relatively unseasoned portfolio that could deteriorate in an economy that continues to experience challenges. Even though about 75% of its asset base is predominantly in the lower-risk residential sector, challenging economic conditions could increase NPAs (particularly in the business banking book), which were 0.65% of total loans at June 30, 2010 (0.23% in fiscal 2008). A key weakness in Kiwibank's credit risk profile is its relatively unseasoned loan portfolio, which has grown rapidly 5

6 (by an average of about 45% per year) in the past three years. The bank's future asset quality also relies somewhat on its ability to manage its expansion into business banking, a segment in which losses are typically higher than those experienced in residential mortgages, where it has less experience. Standard & Poor's currently gains comfort from the bank's reasonably conservative lending policies to help mitigate potential losses. Kiwibank's underwriting standards are good, with developed comprehensive credit systems and policies that enable centralized approval and processing, and good security cover. Although the bank provides loans with a loan-to-value (LVR) ratio of 95%, loans with an LVR above 80% are subject to mortgage insurance with QBE Lenders' Mortgage Insurance Ltd. (AA-/Stable/--) or HNZC. To date, the bank's credit policies have supported its adequate asset quality. Currently, retail housing secures 73% of all business-banking loans and about 90% of the total loan portfolio. The bank's unsecured lending remains small, at about 4% of total loans at June 30, Kiwibank also places a strong emphasis on loan serviceability. Unlike similar small banks, Kiwibank's loan portfolio is relatively well diversified geographically largely due to its well-spread distribution network. Geographically, Kiwibank has a concentration of about 40% of its mortgage-lending, and 47% of its business-banking activities in Auckland. Kiwibank's provisioning, particularly in the business banking book, is likely to increase in fiscal However, it is not expected to be tested against a more seasoned portfolio. Loan loss reserves increased to 0.19% of the loan portfolio (0.05% at June 30, 2008), with collective provisions of NZ$9.5 million at June 30, 2010 (NZ$7.3 million in fiscal 2009). At end-september 2010, the bank reported provisions of NZ$10 million. Funding and liquidity risk Kiwibank's funding profile is good, underpinned by a rapidly growing retail deposit base, and supplemented by wholesale, market-accessed, registered certificates of deposit (RCD), subordinated bond issues, and a sizeable government guaranteed bond issue in Recently, Kiwibank set up its inaugural ECP program, and will access this market in This overall increase in wholesale funding has seen the ratio of customer deposits to total funding drop to 60.1% at June 2010 (69.4% at June 2009), and the ratio of loans-to-deposits deteriorate to 151% (126.6% in the previous year). Both ratios remain comparable with similarly rated peers'. Kiwibank's ability to access wholesale funding markets has improved funding diversity but in our view this is a riskier source of funding relative to retail deposits. The bank's rapid growth strategy coupled with an intensely competitive environment for raising deposits has resulted in the bank increasingly shifting into wholesale funding markets. The bank's wholesale funding is no longer predominantly related to the RCD program, and totaled NZ$951 million at June 30, Although wholesale funding represents a small 8% of total funding (deposits plus borrowings), it is likely that funding from these sources will increase to meet growth objectives in the medium term. Any increase, in our view, is likely to remain within the tolerance of the current rating, and be comparable with similarly rated peers. Strong deposit growth continues to support the bank's ability to fund its loan book. The bank's total deposits grew significantly to NZ$10.4 billion at June 30, 2010 (see chart 1). The majority of this growth is from wholesale deposits, which, in our view, are potentially more price sensitive relative to traditional retail deposits. While there is strong competition in New Zealand to raise low-cost retail deposits, the bank's ability to maintain a resilient deposit base is an important risk to manage. Supporting the bank's deposit profile is that high-value depositors (deposit value of more than NZ$5,000) and retired customers collectively form a major share of the deposit base. Standard & Poors RatingsDirect on the Global Credit Portal December 29,

7 Kiwibank's good liquidity profile mitigates any potential for financial stress in the near term. Its liquidity management practices remain a crucial part of the bank's risk management program and are essential in further developing customers' confidence in the bank. Also supporting liquidity is the bank's access to NZ$600 million of internal securitization, completed in Additionally, in our view, the bank's liquidity scenario tests are sound and appear reasonably conservative. NZ Post is also expected to support Kiwibank in a liquidity crisis. Chart 1 Table 1 Kiwibank Ltd. Asset Quality, Funding, And Liquidity Ratios --Year-ended June 30-- (%) Gross nonperforming assets/customer loans plus other real estate owned Net nonperforming assets/customer loans plus other real estate owned (0.2) Loan loss reserves/gross nonperforming assets Loan loss reserves/customer loans New loan loss provisions/average customer loans N/A Net charge-offs/average customer loans N/A Customer deposits/funding base Total loans/customer deposits Total loans/customer deposits plus long-term funds

8 Table 1 Kiwibank Ltd. Asset Quality, Funding, And Liquidity Ratios (cont.) Customer loans (net)/assets (adjusted) N.A.--Not available. N/A--Not applicable. N.M.--Not meaningful. Market risk Exposure to market risk is limited because the bank offers limited wholesale and treasury products to its customers, and doesn't undertake proprietary trading. With nearly 60% of the bank's home loan book on fixed rates at end-june 2010, the bank has an exposure to structural interest rate risk as longer dated loans are funded by short-term liabilities. This is actively managed using traditional derivatives such as swaps, forward-rate agreements, futures, and options to ensure risks are maintained within set limits. These risks are regularly reported to its asset and liability committee (ALCO) and NZ Post equivalent, where there is a preferred policy of minimal net exposures. Kiwibank's asset-and-liability management process appears well developed, and the ALCO and NZ Post-equivalent is provided with interest rate risk, liquidity, and capital management reports. Management's key focus has been on liquidity management and hedging the interest rate risk within the nontrading balance sheet to maintain compliance with internal policies. Table 2 Kiwibank Ltd. Loan Portfolio --Year-ended June 30-- (Mil. NZ$) Public Sector/Government Residential real estate loans 9, , , , ,505.1 Other consumer loans N/A N/A N/A N/A N/A Commercial real estate loans N/A N/A N/A N/A N/A Commercial/corporate loans N/A N/A Total real estate loans N/A N/A N/A N/A N/A Leases Foreign loans N/A N/A N/A N/A N/A Other loans Nonperforming loans not included in above NZ$--NZD-New Zealand dollar. N.A.--Not available. N/A--Not applicable. N.M.--Not meaningful. Profitability: Earnings Profile Has Started To Improve Despite rapid annual growth, Kiwibank's operations lack sufficient scale and remain small compared with major banks'. A combination of a large contraction in margins due to strong competition for home loans and low-cost retail deposits, and relatively high levels of provisions because of deteriorating macroeconomic conditions, has undermined Kiwibank's earnings in the last year. In 2010, core earnings declined to NZ$61 million from NZ$68 million in the previous year. While Kiwibank's earnings profile has started to improve, we believe that the bank's ability to continue to improve its profitability would depend on its ability to continue strong loan growth on the back of competitive pricing while maintaining good access to low-cost funds. At year-ended June 2010, net interest margins reduced to 1.2% from Standard & Poors RatingsDirect on the Global Credit Portal December 29,

9 1.9% in In the first half of fiscal 2011, net interest margins have improved to about 1.4%. Kiwibank's earnings may be vulnerable to volatility, as compared with more profitable and established local peers, particularly because growth will be challenged by the difficult conditions in the New Zealand economy, and potentially higher provisioning costs. At year ended June 2010, new loan loss provisions to revenues increased to 5.9% from 4.8% in the previous year. While the bank's noninterest expenses remained high in 2010 at 67.6% of revenues, they continue to show a declining trend (see chart 3). Overall operating costs are high, mainly due to a relatively small scale, infrastructure expenditure, and an expansion of its product and processing capabilities. If the bank achieves greater economies of scale, it should be able to manage costs effectively. The revenue base shows a degree of diversity. Net interest income accounted for a moderate 44.3% of total revenue in About 55.8% of revenues were from non-interest-income sources, which include income earned from the management of NZ Post's agency business. Chart 2 9

10 Chart 3 Table 3 Kiwibank Ltd. Profitability Ratios --Year-ended June 30-- (%) Net interest income/average earning assets N/A Net interest income/revenues Fee income/revenues Market-sensitive income/revenues 12.0 (1.5) (2.6) Personnel expense/revenues Noninterest expenses/revenues New loan loss provisions/revenues Net operating income before loan loss provisions/loan loss provisions , , Net operating income after loan loss provisions/revenues Pretax profit/revenues Tax/pretax profit Core earnings/revenues Core earnings/average adjusted assets N/A Noninterest expenses/average adjusted assets N/A Core earnings/average risk-weighted assets N.M. N.M. N.M. N.M. N.M. Standard & Poors RatingsDirect on the Global Credit Portal December 29,

11 Table 3 Kiwibank Ltd. Profitability Ratios (cont.) Core earnings/average adjusted common equity Pretax profit/average common equity (%) N/A N.A.--Not available. N/A--Not applicable. N.M.--Not meaningful. Capital: Satisfactory Resources For Risk Profile Kiwibank's capital resources are satisfactory for the bank's risk profile. According to Standard & Poor's risk adjusted capital (RAC) framework, Kiwibank's RAC ratios are supportive with a 10.6% ratio before diversification and concentration adjustments and 8.6% after adjustments. The bank's target is to maintain its regulatory capital adequacy ratio above 9.0%, which is higher than the minimum 8.0% requirement for New Zealand banks. The bank's stand-alone ability to absorb unexpected operating risks is satisfactory. The bank has an absolute adjusted total equity base of NZ$437 million at June 30, Management of capital is largely driven by the rate of growth in the balance sheet. Supporting our view on capital is that Kiwibank seeks to achieve its growth targets without any direct capital injection from the parent. Nevertheless, we believe that support from NZ Post would be forthcoming if required (see table 1). Additionally, no dividends have been distributed so far, and the bank has been successful in accessing funds outside of its parent by raising hybrid capital and subordinated bonds. The bank's financial flexibility is good, which is strengthened by the recent provision of an uncalled capital facility. Table 4 Capital Injection By New Zealand Post Ltd. (Equity Injection) (mil. NZ$) Table 5 Kiwibank Ltd. Risk-Adjusted Capital Data NZ$ Exposure* Basel II RWA Average Basel II RW (%) Standard & Poor's RWA Average Standard & Poor's RW (%) Credit risk Government and central banks 928,264,765 22,182, ,298,400 3 Institutions 460,708, ,868, ,456, Corporate 131,604,965 54,876, ,091, Retail 10,491,833,348 4,804,743, ,907,715, Of which mortgage 9,624,006,289 3,936,916, ,335,362, Securitization Other assets 156,688,107 85,294, ,783, Total credit risk 12,169,100,124 5,088,965, ,209,345, Market risk Equity in the banking book Trading book market risk ,039, ,559,

12 Table 5 Kiwibank Ltd. Risk-Adjusted Capital Data (cont.) Total market risk ,039, ,559, Insurance risk Total insurance risk Operational risk Total operational risk ,662, ,811, Basel II RWA Standard & Poor's RWA % of Standard & Poor's RWA Diversification adjustments RWA before diversification 5,973,667,730 4,117,716, Total adjustments to RWA ,757, RWA after diversification 5,973,667,730 5,063,474, Capital ratio Capital ratio before adjustments Capital ratio after adjustments Tier 1 capital Tier 1 ratio (%) Total adjusted capital Standard & Poor's RAC ratio (%) 587,130, ,000, ,130, ,000, *Exposure at default. Exposure and Standard & Poor's risk-weighted assets for equity in the banking book include minority equity holdings in financial institutions. Adjustments to Tier 1 ratio are additional regulatory requirements (e.g. transitional floor or Pillar 2 add-ons). RWA--Risk-weighted assets. RW--Risk weight. RAC--Risk-adjusted capital. Sources: Company data as of June 30, 2010, Standard & Poor's. Table 6 Kiwibank Ltd. Capital Ratios --Year-ended June 30-- (%) Adjusted common equity/risk assets (%) N.M. N.M. N.M. N.M. N.M. Tier 1 capital ratio Adjusted total equity/adjusted assets Adjusted total equity/managed assets Adjusted total equity plus loan loss reserves (specific)/customer loans (gross) Common dividend payout ratio N.A.--Not available. N/A--Not applicable. N.M.--Not meaningful. Table 7 Kiwibank Ltd. Summary Balance Sheet --Year-ended June 30-- (Mil. NZ$) Assets Cash and money market instruments Securities 1, , , Trading securities (marked to market) Nontrading securities Standard & Poors RatingsDirect on the Global Credit Portal December 29,

13 Table 7 Kiwibank Ltd. Summary Balance Sheet (cont.) Mortgage-backed securities included above Loans to banks (net) Customer loans (gross) 10, , , , ,614.1 Loan loss reserves Customer loans (net) 10, , , , ,608.6 Earning assets 11, , , , ,994.6 Equity interests/participations (nonfinancial) N/A N/A N/A N/A N/A Investments in unconsolidated subsidiaries (financial companies) N/A N/A N/A N/A N/A Intangibles (nonservicing) Interest-only strips N/A N/A N/A N/A N/A Fixed assets Derivatives credit amount N/A Accrued receivables All other assets Total assets 12, , , , ,072.8 Intangibles (nonservicing) Minus insurance statutory funds Adjusted assets 12, , , , ,072.8 Liabilities Total deposits 10, , , , ,442.1 Noncore deposits 3, , , Core/customer deposits 6, , , , ,376.6 Acceptances Repurchase agreements N/A N/A Other borrowings 1, , Other other borrowings Other credit reserves N/A N/A N/A N/A N/A Other liabilities Total liabilities 11, , , , ,900.4 Total equity Manditorily convertible securities Limited life preferred and quasi equity Enhanced trust preferred Minority interest-equity N/A N/A N/A N/A N/A Common shareholders' equity (reported) Share capital and surplus Revaluation reserve (45.5) (68.2) (13.8) (3.6) N/A Retained profits Other equity N/A N/A N/A N/A N/A Total liabilities and equity 12, , , , ,072.8 NZ$--NZD-New Zealand dollar. N.A.--Not available. N/A--Not applicable. N.M.--Not meaningful. 13

14 Table 8 Kiwibank Ltd. Equity Reconciliation Table --Year-ended June 30-- (Mil. NZ$) Common shareholders' equity (reported) Plus minority interest (equity) Minus dividends (not yet distributed) Minus revaluation reserves Minus nonservicing intangibles (47.5) (43.2) (47.1) (37.0) 0.0 Minus interest-only strips (net) Minus tax loss carryforwards Minus postretirement benefit adjustment Minus other adjustments N/A N/A Adjusted common equity Plus admissible preferred and hybrids Plus general reserves Plus unrealized gains N/A N/A Minus equity in unconsolidated subsidiaries Minus capital of insurance subsidiaries N/A N/A Minus adjustment for securitized assets Adjusted total equity NZ$--NZD-New Zealand dollar. N.A.--Not available. N/A--Not applicable. N.M.--Not meaningful. Table 9 Kiwibank Ltd. Profit And Loss --Year-ended June 30-- (Mil. NZ$) Net interest income Interest income Interest expense Operating noninterest income Fees and commissions Net brokerage commissions Trading gains 64.5 (106.3) (41.8) Other market-sensitive income (28.1) (61.2) N/A Net insurance income Equity in earnings of unconsolidated subsidiaries Other noninterest income Operating revenues Noninterest expenses Personnel expenses Other general and administrative expense Net operating income before loss provisions Credit loss provisions (net new) Net operating income after loss provisions Standard & Poors RatingsDirect on the Global Credit Portal December 29,

15 Table 9 Kiwibank Ltd. Profit And Loss (cont.) Nonrecurring/special income Nonrecurring/special expense Amortization of intangibles Impairment of intangibles N/A Pretax profit Tax expense/credit Net income (before minority interest) Minority interest in consolidated subsidiaries N/A N/A N/A N/A N/A Net income before extraordinaries Net income after extraordinaries NZ$--NZD-New Zealand dollar. N.A.--Not available. N/A--Not applicable. N.M.--Not meaningful. Table 10 Kiwibank Ltd. Core Earnings Reconciliation Table --Year-ended June 30-- (Mil. NZ$) Net income (before minority interest) Minus nonrecurring/special income 0.0 (11.1) Plus nonrecurring/special expense Plus or minus tax impact of adjustments Plus amortization/impairment of goodwill/intangibles Minus preferred dividends Plus or minus other earnings adjustments N/A Core earnings NZ$--NZD-New Zealand dollar. N.A.--Not available. N/A--Not applicable. N.M.--Not meaningful. Standard & Poor's (Australia) Pty. Ltd. holds Australian financial services licence number under the Corporations Act Standard & Poor's credit ratings and related research are not intended for and must not be distributed to any person in Australia other than a wholesale client (as defined in Chapter 7 of the Corporations Act). Ratings Detail (As Of December 29, 2010)* Kiwibank Ltd. Counterparty Credit Rating AA-/Stable/A-1+ Certificate Of Deposit Local Currency A-1+ Subordinated (2 Issues) A+ Counterparty Credit Ratings History 20-Aug-2008 AA-/Stable/A Apr-2007 AA-/Negative/A Nov-2001 AA-/Stable/A-1+ Sovereign Rating New Zealand Foreign Currency AA+/Negative/A

16 Ratings Detail (As Of December 29, 2010)*(cont.) Local Currency Related Entities New Zealand Post Ltd. Issuer Credit Rating Certificate Of Deposit Local Currency Commercial Paper Senior Unsecured (1 Issue) Senior Unsecured (2 Issues) Subordinated (1 Issue) AAA/Stable/A-1+ AA-/Stable/A-1+ *Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Poor's credit ratings on the global scale are comparable across countries. Standard & Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country. A-1+ A-1+ AA+ AA- A Standard & Poors RatingsDirect on the Global Credit Portal December 29,

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