International ratings agency Moody's Investors Service has changed its outlook for the New Zealand banking system to negative from stable.
Moody's said the outlook reflects its view that disruption from the coronavirus outbreak will weaken New Zealand’s economic growth in 2020, which will lead to increases in problem loans, weighing on banks’ profitability and capitalisation.
"Moreover, a sharp drop in interest rates since the onset of the outbreak will weigh on banks’ net interest margins (NIMs), which already have been under pressure due to intense competition in the mortgage market. Banks are also exposed to ongoing volatility in wholesale funding markets.
"These challenges outweigh currently strong capital and asset quality, as well as major stimulus measures by the New Zealand government and monetary policy easing by the Reserve Bank of New Zealand (RBNZ), Moody's said in a new report.
"Asset quality will weaken. Coronavirus-related economic disruptions will lead to increases in problem loans.
"While the performance of housing and dairy loans, the two largest segments of New Zealand banks’ loan portfolios, remains strong, high indebtedness makes borrowers vulnerable to an economic downturn.
"In particular, a rise in unemployment will hurt the quality of housing loans, which, at about 58%, make up the largest part of banks’ loan portfolios. Government support measures and time-limited financial assistance packages by banks will limit deterioration of asset quality in the short term."
Moody's said bank profit pressure will intensify.
"Increases in loan losses and continued pressure on margins from low interest rates will hurt banks’ profitability. New lending volumes will also decline as economic disruptions from the coronavirus outbreak persist. Banks can cut costs by reducing non-essential investment, but this is unlikely to fully offset the impact of revenue declines."
Moody's noted that New Zealand banks’ strong capitalisation will continue to provide solid buffers against loan losses while restrictions on dividends will provide some offset to these challenges.
Moody's also said funding and liquidity would hold steady.
"New Zealand banks have been lengthening the term structure of their market funding for a number of years, and this will greatly offset the risk of New Zealand banks’ relatively heavy dependence on wholesale funding, especially from offshore markets. Slower credit growth will also reduce banks’ wholesale funding needs."
Key points from the report included:
» Operating environment is deteriorating.
» Asset quality will weaken.
» Pressure on capital will grow but banks will maintain solid buffers to absorb losses.
» Profit pressure will intensify.
» Funding and liquidity will hold steady.
» Government support assumptions remain unchanged.