Moody's retains 'stable' outlook on NZ banking system, sees margin pressure

Moody's Investors Service has maintained its stable outlook on New Zealand's banking system, but says the risk of an asset bubble triggered by a lending boom remains a key credit concern.

Moody's assistant vice president and analyst Daniel Yu says the stable outlook over the next 12 to 18 months reflects Moody's expectation of continued improvements in New Zealand's economy, supported by post-earthquake reconstruction in Christchurch and low interest rates.

"The stable outlook is based on Moody's expectation that GDP will grow by an average of 2.2% this year and 2.6% next year," Yu says. "In addition, Moody's believes that whilst rising house prices and high household indebtedness reflect some domestic imbalances, they will not pose significant risks to the stable outlook in the coming 12-18 months."

Yu notes that stricter regulatory requirements have forced banks to reduce their dependence on wholesale funding markets, although at 32% of total funding, New Zealand big banks' exposure to wholesale funding remains a key sector weakness. Moody's estimates two-thirds of this wholesale funding comes from offshore. The 32% of total funding estimate is down from 37% as recently as April.

"However, further improvements to bank funding profiles are likely to be limited, given our economic growth assumptions which expect loan demand to strengthen over the time of this outlook," says Yu.

"In particular, two-thirds of wholesale funding come from offshore, which is a reflection of New Zealand’s persistent current account deficit. To the extent that stronger cyclical growth could push up demand for imports, this dependence on external funding will likely remain a key feature in this system, subjecting banks to possible disruptions in the wholesale funding market," says Moody's.

"Another counterpoint comes from the fact that recent deposit growth has become increasingly focused on term-deposits, which attract a higher cost and are likely to be more price sensitive than traditional transaction accounts. Over 2007-2012, term-deposits grew from around 43% of customer deposits to 57%. This cast doubts on whether banks are seeing more, but less reliable, deposits, with the implied higher deposit costs clearly a negative to profitability."

Margin pressure seen

Meanwhile, Moody's expects banks to face margin pressure as they try to grow their share of loans through price competition, and as borrowers choose lower-margin fixed-term mortgages in response to a possible increase in the Official Cash Rate from its record low of 2.5%.

"Nonetheless, bottom line profits should be supported by a mid-to high-single digit percentage point growth in loans over the horizon of Moody's outlook," says Yu.

"Under this circumstance, we expect net earnings retention will outstrip loan growth to help banks maintain their robust capitalization and remain well positioned to meet higher capital requirements (Reserve Bank mandated capital conservation buffer) from 1 January 2014."

The credit rating agency says high house prices and high household indebtedness remain two key economic risks.

"Whilst the impact on banks will be mitigated by their strong capital buffers and recent macro-prudential measures, the risk of an asset bubble triggered by a lending boom remains a key credit concern."

Moody's says its stable system outlook is consistent with the stable outlooks for the banks' average a3 standalone bank financial strength ratings and their Aa3 long-term issuer ratings.

"The outlook also reflects Moody's stable outlook on the New Zealand government's Aaa rating."

Moody's rates five of New Zealand's 11 locally incorporated banks being ANZ NZ, ASB, BNZ, Kiwibank and Westpac, which represent 88% of total system loans between them.

See credit ratings explained here.

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3 Comments

David , the risks we face are not just the Asset Price bubble , because the world economy is again on a Knife edge

  • Respected Economist JAMES RICKARDS ( Author of CURRENCY WARS) believes the Fed will taper in September
  • There is a bloodbath in emerging markets  on runmours of tapering ( Brazil , India and South Africa in particular are being hammered )
  • NORIEL ROUBINI  reckons the US is heading for another Fiscal showdown
  • He is pessimistic on Syria
  • Oil prices could rocket in October with the onset on Winter in Northern hemisphere and another  shooting match in the Middle East .
  • The next round Southern European debt instalments are looming

So, get your deposits out of  New Zealand banks and into short term NZ government debt.?
 
The so-called sticky term deposit heroes of the New Zealand banking systen are not being rewarded for the risk undertaken and the RBNZ has OBR in place to stiff them once foreign wholesale funding dries up leading to system risk and insolvency. There is just not enough unsecured capital in each bank to pretend otherwise once ptotected investors such as covered bond holders and swapped currency parties are excluded by law from OBR's  provisions.

Does the Australian Government Guarantee (Financial Claims Scheme) up to AU$250k apply to deposits by non-residents?