The Fitch Ratings says New Zealand's regional lenders face a tougher time with intense competition from the four big Australian-owned banks.
The ratings agency has assessed the strengths and weaknesses of Kiwibank, the Southland, Nelson and Wairarapa building societies, as well as TSB Bank, Heartland Bank and the Co-operative Bank, whose combined share of the market is 15%.
It says while the smaller financial institutions do not have the scale and sophisticated systems of the big four, it recognises the value they gain from the communities they service.
Local ownership, Fitch says, means regional lenders have loyal and at times parochial community support.
They also benefit from simple business models, lending to fund residential mortgages, business and personal loans, and avoiding riskier and more complex financial products.
Regional lenders are largely funded by household deposits and, since the global financial crisis, healthy deposit flows have supported loan growth and enabled the lenders to achieve adequate profitability.
However, Fitch says regional lenders are constrained by their small capital base, credit exposure concentration and small size, which are the main barriers to higher ratings.
A director at Fitch's Sydney financial institutions team, Andrea Jaehne, says in general in New Zealand smaller regional lenders are performing well, despite strong head winds from the competition, particularly in the residential mortgage markets.
