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New Zealand banks have seen part of their credit score improve in line with an easing in household sector financial risks.
Global ratings agency Fitch said the banks' operating environment (OE) score had improved with a strengthened regulatory framework and closer oversight over the last decade.
A tightening of the Reserve Bank's regulation had reduced the risk of large impairment losses for New Zealand banks, the agency said.
Those regulatory measures included a strengthening of banks' capital framework, which was among one of the most conservative globally, and macro-prudential tools aimed at reducing risks in the residential mortgage sector.
Fitch senior director Tim Roche said New Zealand had maintained financial stability through some challenging conditions during and after the Covid-19 pandemic.
"We've seen over the last decade or so there has been a lot of strengthening in the regulatory framework for banks, which we think has led to a lowering of risk, particularly around household exposures," he said.
"Whilst we have seen a reduction in risk, we still see it as being a potential area of risk, given the level of leverage that sits within households in New Zealand."
Roche said the underlying financial stability had underpinned Fitch's revision of the OE score to 'a+'/stable from the previous 'a'/stable.
While New Zealand household debt levels still remained relatively high compared to global peers, he said the 'a+' score reflected that risk, and remained below the implied 'aa' category score.
Fitch said the score revision would not result in any immediate rating changes to New Zealand bank's viability ratings, though regulatory changes were likely to support stronger underlying credit profiles over time, particularly in relation to capitalisation and leverage.