The Fitch Ratings Agency says New Zealand's regional lenders are changing their markets and products in order to grow profitability.
The 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 about 15%.
Its report says these lenders face a tougher time with intense competition from the four big Australian-owned banks.
A director at Fitch's financial institutions team based in Sydney, Andrea Jaehne, says the regional lenders can choose to either reduce their prices or to lower their credit standards in order to remain competitive.
She says the latter is not happening and the regional lenders are choosing to be competitive on prices, which can have an effect on their profitability.
Ms Jaehne says so far the interest margins remain very strong and pricing pressures have been partly offset by the reduced funding costs, and that has helped in the previous year.
However, she says going forward Fitch expects pressure on smaller lenders.
"We don't really expect them to lower credit standards massively but we can see in some cases our lenders going into new markets and new products and obviously we are monitoring carefully how the lenders are doing that and how their asset quality is performing."
But Ms Jaehne says that typically takes about 18 - 24 months before any effects of that come through.
She says a lot of the regional lenders are very active in their home regions and some of them are starting to grow their businesses outside their home region.
Ms Jaehne says after the global financial crisis the major banks did not grow their loan books, partly because of regulation that came in from the central bank, but over the last 18 months they have started to increase their loan books again.
She says previously the regional banks were benefiting from the major banks withdrawing from the market, but now the competition is picking up again making it harder for the smaller players to compete.
But Ms Jaehne says the regional banks often win on the service side and they are in some areas where the major banks are not.
She says they also benefit from strong customer relationships.
