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In a new report ratings agency Moody's Investors Service says disruption from coronavirus will weaken NZ’s economic growth leading to increases in problem loans, weighing on banks’ profitability and capitalisation

In a new report ratings agency Moody's Investors Service says disruption from coronavirus will weaken NZ’s economic growth leading to increases in problem loans, weighing on banks’ profitability and capitalisation

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.

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63 Comments

16
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I thought bank stocks were oversold, not anymore. Everything has changed and banks as we have known them are finished. If it wasn't for the unprecedented level of state support in NZ and Australia, loan losses would have been catastrophic. Banks are now in the pockets of regulators & politicians and have been nationalised in all but name only. Zero rates, low growth and maxed out borrowers will kill profitability.

Change my mind.

25
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Well ANZ must be Ok.
John Key hasn't left the stinking ship yet.

ANZ share price down 45% in last 6m. But it is fine really.
The drop reflects total market confidence

Hes too busy in his safe place -talking to Mike Hosking about anything but ANZ , distancing himself early prior to his well worn ,1st rat off routine IMO.

Key has to take alot of the blame for this mess. He didnt invent Covid-19 but he did vastly destableize our economy purely to keep his "Haves" mates having!!!.....and stuff everyone else.

I thought bank stocks were oversold, not anymore.

What on earth made you think that? I know the banks continually talk about how solid their business health is, but it's largely a confidence trick. Check out any of Cruella's latest media appearances.

John Key hasn't left the stinking ship yet.

He might live to regret that.

Banks are now in the pockets of regulators & politicians and have been nationalised in all but name only.
What about the depositors?

According to the Reserve Bank, the new capital requirements mean banks will need to contribute $12 of their shareholders' money for every $100 of lending up from $8 now, with depositors and creditors providing the rest.

The citizens are underwriting the whole endeavour for virtually nothing after inflation, whilst foregoing decent regular wages to do so. Banks are derelict in their duty to fund productive enterprise because official central bank regulatory capital requirements favour residential property lending for the creditworthy few.

What makes banks so special they can be saved? I'll tell you.

Weak politicians, who are bluffed easy and know they couldn't get a better paying job elsewhere.

Until I see regulation that caps executive wages to not more than 10 times the average workers wage, loans are backed 100% by local deposits and higher taxes on exported profits, I won't be banking with these overseas ponzi scheme banksters.

I suspect and regret that you won't be banking with them for a long time. If you don't mind me asking, who do you bank with?

"Banks are now in the pockets of regulators & politicians and have been nationalised in all but name only." Disagree TK. They are still very much private banks, but although their profits might be hit somewhat (they'll still be in the $100 millions) they are getting tax payer support to prop them up. This means they have been fully successful in socialising their risk. They have conned the RBNZ and politicians into not effectively regulating them and the markets they operate in, and now when their business practices are at risk as a result of a black swan event they are putting their hand out for the dole.

Not unreasonable really as most other business's in NZ have too, but the banks portion will possibly be more than everyone else's, because their activities reach into most aspects of the economy. But they have not been nationalised, and as yet are not really regulated. They just have to go along with the regulators and RBNZ at the moment because if they don't the outcome would be much worse for every one, and ultimately themselves. What comes after will be important. It will tell us what the pollies learnt, and whether they have the balls to act.

could cost more for banks to borrow.

11
up

One way to increase bank profits is to start raising rates to existing mortgages. Start squeezing those that still have jobs and can pay it. New lending is going to crash and the FHB market just died from Corona. Cheap money got us into this mess in the first place so how is even cheaper money going to get us out ? Lending just got very risky.

Means tested mortgage rates?

13
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I wonder how quick the banks will start looking at house price values and saying no to purchaser as house prices
are heading south and that will speed up price drops creating a fast falling market just as fast as they pushed it up.
They may want a quick 20 percent drop now while governments still have cash to help them out.

15
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Exactly Becnz as soon as house prices start to decline this month the brakes will go on lending. Its a downward spiral the second we come out of lockdown. Bank lending has always been based on the valuation of the house so the second prices go into freefall the lending stops.

Watching the decline on sharemarket I wonder if this could lead to the same recording breaking speed to house prices.
The DOW is tracking faster down than 1929.

“Bank lending has always been based on the valuation of the house so...”

I thought they looked at loan serviceability as well? With a stress test rate of circa 7% and/or percentage of income?

Yep, its a little mouse wheel of perfection for bank profits, until values turn tail and run for the hills.

This could be a cause for potential market dislocation in the next few weeks - there are over US$1.5 trillion of debt owed by apartment owners. Then there is the commercial mortgages and CMBS to add also ... Then there are investors who purchased RMBS and CMBS using leverage ..

AJ, I think for the people in NZ they are all waiting to get guidance from the Harvey Norman v. Landlord reality show happening as we speak.
The 24 hrs are nearly up and locksmith are getting ready to put new locks on all the big item shops dotted around NZ.

Imagine the local HN manager driving past tomorrow and seeing all the stock out in the parking lot..

We have a similar tenant, who we know can pay. Why shouldnt they pay at least warehouse rent for the storage of their goods? These big boys are just playing the game in the hope to burn you off, and it could work for some.

Lets hope the government brings in some fair and reasonable regulations, to avoid clogging the courts with even more meaningless scraps; that only enrich the lawyers.

but who else is going to rent the buildings?

Also beware of building companies they are all struggling and may start collapsing soon and create a sector wide collapse.
But that may be good as it will force them to restart at lower pricing which will also boost new home build in the future.
Compared to Australia our building cost are massive.

Do building companies have that fat a margins?
I thought a lot of them were failing already because of rising costs post tender

High-profile failures this year have drawn attention to the "razor-thin margins" that construction companies are working with, and the difficulty they have in making projects pay.

When Ebert Construction went into receivership this week...

There's the opportunity. Many people have been calling for it for a long time now, but the Government could look at the material costs of building ad identify where the gouging is occurring?

Banks will need to be far smaller with a greater emphasis on product margins. Almost every bank has IT projects they can defer and reduce the number of high paid staff in that department. They will need to get going quickly however to be ready to face next QTR.

For completeness Moody's also downgraded the parents
Moody’s lowers its outlook for Australia’s banking system to negative from stable
Thu 2 Apr 2020 01:41:24 GMT
The ratings agency citing the "broad and growing scope of economic and market disruption from the coronavirus outbreak".
"While Australian banks' current asset quality is very strong, it will deteriorate significantly if disruptions persist for a prolonged period and push up the unemployment rate, which will lead to more impairments of residential mortgages, which comprise approximately two thirds of banking system loans"
"We view the current economic support packages, including fiscal stimulus, enhanced financial market liquidity and term funding to support credit intermediation, as measures that are temporarily increasing the level of indirect government support for the banking system"

11
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Hold on - haven't we been told the banks pass all their stress tests with no problems. Is this scenario not part of a stress test?

11
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Up to 40% drop in the housing market, we were told.

Assuming everyone ignores the negative equity, can continue working and paying off the mortgage, our models estimate that the banks should probably be fine!

Post the 87 crash, a number of people I knew had negative equity in their homes and the sky didn't fall. BUT they also had good, stable jobs that survived. That might not be the case this time around for quite a few?

Rick, Yes but did anyone mention a virus?

The government, the RBNZ and banks themselves have been well drilled in the mantra "The banks are strong, they have plenty of capital". They then just say it over and over and over again.

I've always been a fan of the German Banking system. The majority of lending is done by community based or cooperative banking. In fact only around 15% of mortgage lending is done by the commercial banks.

The uk once had challenger banks similar to countrywide and united in nz back in the day. Problem was they get gobbled up once they start increasing market share.

14
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Might be good to have more of the bank interest recirculating through NZ instead of flowing to Australia. That $5 billion that went to AU last year could be useful to NZ right now.

Now that's an idea.

Be good to invest in something productive rather than 70% residential mortgages. Oil, Gas, West coast timber (sustainable of course), coal, water - make China pay through the nose for it if they want it, secondary and tertiary industries for all our raw materials we pay other people to refine. Do that for 10 years we'll be Norway just less better looking.

I've never understood why the Right in NZ (in name, at least) are up in arms about us not allowing enough exploration for oil (although strangely not as much about getting us a good deal from it) yet comparatively willing to give away valuable water for free when New Zealand society could also be profiting from that. Both liquids from our native land, both valuable in the market, yet it's vocally insisted one should be given away for free and Kiwis should wear the risk around that.

Politicians are captured by the few, are short term thinkers, and have little understanding of whats good for the country.

Vote with your wallet. I did, never looked back.

"Fellow socialists, do not be afraid. I have it on good ''authority'' that the NZ Government will bail out all & everyone to the tune of half a trillion NZ $'s. This is our dream opportunity to put the corrupt capitalist system in its place. The skip."

Don't forget the unemployment rate will hit double digits, house price will be shielded from that no doubt..!

"Asset quality will weaken"
Meaning that th mortgagees that banks call "equity" and leverage off, are going to be threatened due to house price downward direction in next 6-12 months minimum.
So, ANZ share price (down 45% in last 6m) will be hit further.
Note that ANZ exposure to CDO and MBS is around 22% of assets
According to CEO of Citibank, on TV with his old china, Trump, this is: "not a financial crisis"
YET. Coming rapidly friends.

This is the one to look at more closely;

https://bankdashboard.rbnz.govt.nz/summary

Apparently update is done via automation and in real-time.

See in particular, Asset quality/non-performing loans.

Thanks for posting Kate. BTW, this dashboard is really well produced.

Thanks for sharing that's an awesome link.

Looks Quarterly, not real time unless there's some button to pick up a daily figure. I didn't take a screenshot about two weeks ago but if I recall some numbers look the same as two weeks ago. The 1/4 ending Mar20 is going to be interesting and the end jun 1/4 even more interesting

Moody’s has been reading intdotco .....finally catching up with our wise commentators.

This is just the beginning not only for NZ but for many countries in the world.

Though NZ was in a better situation but will suffer much as is heavily dependent on Tourism, Hospitality, International student which will be badly affected which in rurn will effect retiail and housing market.

NZ is more exposed than the MSM will admit. We are not as special as we seem to think we are. Its going to take more than good skills with no.8 wire this time cobber!

Will China be allowed to buy and take over the Aussie Banks ?

Well the neighbours are pissed that local Chinese/Ozzies shipped at least 150 tonnes of Virus PPE out of the country early March. They now require Fed govt permits for any foreigners purchase of assets over $0.00

Good on the Aussie journos for digging into this. Anyone know if it happened here too?

This risk was always there.

Why only now are Moody's commenting, being blissfully unaware when everything priced for perfection.

Nope, NZ Banks won't get this DGMs predicaments..too big & too important to fail. The loss shall be socialised by any respective govt.Orr's team already read my memo by this time: Further OCR reduction, defer the Banks deposit guarantee (after it sounds 'insensitive' to do it this year), lowered down further the CAR to 25%, extend to 10yrs due to current obvious monetary contraction. Sorry team, you got no choice. to avoid that OBR. For LVR & housing Dep?, just remember Not Now.. it's all about timing, that little sparks getting faded by the day.. downplay these LVR & FHB deposit favourable announcement for now.. D it, spring time. RE is essential services to kickstart NZ economy.

Are we different than any other countries banks right now.... not that they are NZ owned anyway for the most part.

But NZ's difrunt ?!?

Just imagine being a specuvestor who hasn't already jumped ship.... scary!

Who cares what Moody's think? these are the same idiots who rated CDO's AAA+ and caused the GFC
They get paid by the companies they provide ratings for so have a massive conflict of interest...

What they think does not really mean much other than what is packaged into the bonds retirement funds buy

Is anything ever right with a lot of you?
Asks are going to be just fine.
Yes their profits will drop but the lending has been quite conservative over the last few years.
House prices are just not going to crash so you can stop predicting % drops.
Of course some business owners will need to sell to free up cash but then they have Probably made plenty anyway.
The government guaranteed business loans being guaranteed by 80% by the NZ government only comes in when the Bank has realised the security that the Bank holds to secure the loan, so what business owner is going to be wanting to borrow more money from the Bank,on the basis that they could well be throwing good money after bad and lose all their years of hard toil including their home?
We should all wait to see what happens as at the end of the day we have 13 in hospital, 1 in ICU and one death unfortunately who had issues already.
Yes this crap is going to sort out a lot of business owners who were marginal before, and the ones who invested in the productive sector apart from housing investment!!