Big bank credit ratings in no immediate danger of downgrade from Fitch despite its concerns about potential asset bubbles

Big bank credit ratings in no immediate danger of downgrade from Fitch despite its concerns about potential asset bubbles

By Gareth Vaughan

Fitch Ratings says despite its warning New Zealand's major banks are facing increasing challenges, their credit ratings are in no immediate danger of downgrade.

Fitch yesterday published a report on New Zealand banks' operating environment, in which it said strong asset growth and fierce price competition were potentially leading to asset bubbles. See our story on the report here.

Fitch's Sydney-based senior director Tim Roche told that despite the credit rating agency's concerns about the New Zealand banking sector, there was no downgrade looming for the country's big four banks' credit ratings.

"Their ratings are driven off their parent ratings so for a downgrade of what we call the issuer default rating, which is the AA- rating, or even a change in the (stable) outlook, that's going to be driven by a change in the parent's ratings," Roche said. "And we've just recently reviewed the Australian parents. So there's no immediate pressure on those ratings."

New Zealand's big four banks - ANZ, ASB, BNZ and Westpac - are owned by Australia's ANZ Banking Group, Commonwealth Bank of Australia, National Australia Bank and the Westpac Banking Corporation.

"Where there may be some (ratings) pressure, and it's probably not immediate, but maybe 6-12 months down the line, is on their stand alone ratings, what we call their viability ratings," added Roche.

"That's where we're looking to try and strip out the benefits that they get from their parent. And to the extent that we continue to see the build up of pressure within the housing market, the competition, margin pressure, some of the issues around bad debts, there may be some negative pressure there on their stand alone ratings."

In the middle of March Fitch affirmed its AA- ratings with a stable outlook on the big four New Zealand banks. It also affirmed their viability ratings at 'a'.

Fitch says its viability ratings are designed to be internationally comparable and represent Fitch's view on the intrinsic credit worthiness of an issuer. Together with Fitch's support ratings framework, the viability rating is a key component of a bank's issuer default rating and considers various factors including; industry profile and operating environment, company profile and risk management, financial profile, management strategy and corporate governance. See credit ratings explained here.

Housing market the biggest concern

Roche said Fitch was currently most concerned about the housing market, and specifically house price appreciation.

"Also the competition we're seeing within the banking system," said Roche. "And certainly seeing some of the comments from the RBNZ as well coming out around the price competition, but also talk around credit and the way that's being assessed."

"We're not saying that that's necessarily going to lead to significant issues for the banking system in New Zealand, but just that it potentially could lead towards a bubble situation which may cause issues somewhere down the line."

The Fitch report also highlighted perennial issues raised by credit rating agencies over major New Zealand banks' reliance on offshore wholesale funding markets. Fitch estimates the big four source between 35% to 40% of their funding from wholesale markets.

"We're certainly conscious of the fact that you can only really grow to the extent that the pool of deposits grow," said Roche. "And if you do have higher demand for credit then potentially that means your loans are going to grow faster than deposits, although that hasn't necessarily been the case recently."

"What we would ideally like to see is that to the extent that loans do grow faster than deposits, that those loans are being funded with longer term wholesale funding rather than shorter term funding. I think we are seeing that and certainly the core funding ratio is something that will keep the banks focused on that type of funding profile going forward."

Nonetheless he said the reliance on offshore funding markets was here to stay.

"I don't think that's going to disappear anytime soon. So it's something that we've already factored into the ratings. If we were to see a material deterioration, say deposits decline quite significantly as a proportion and then a greater reliance on short-term funding, there may be some negative (ratings) pressure there."

The Fitch report notes that since the introduction of the core funding ratio, the major banks have grown customer deposits by more than 5% on a compound annual growth rate since 2010, while the compound annual growth rate for gross loans has been below 2%.

"The trend of historically strong customer deposit growth was also reflected in an improving savings rate for both households and corporates/businesses since 2007. However, the savings rate has stabilised since early 2012 most likely the result of the improving property market and consumer and business confidence," Fitch says.

This article was first published in our email for paid subscribers. See here for more details and to subscribe.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.


Exactly correct . No immediate danger to banks now but risk of downgrade in a year to 2 years time.

Exactly correct . No immediate danger to banks now but risk of downgrade in a year to 2 years time.
Do you work for one of the offshore wholesale funding institutions? 

The Fitch report also highlighted perennial issues raised by credit rating agencies over major New Zealand banks' reliance on offshore wholesale funding markets. Fitch estimates the big four source between 35% to 40% of their funding from wholesale markets.
As a significant term depositor in the local NZ banking market I would appreciate a confirmed opinion from one of these offshore lenders.
All else will be irrelevant if one or all of them take the punch bowl away, leaving NZ unsecured creditors to wind down the banks to a size that can be sustained by the NZ deposit base -  hence can we view a potential depositors haircut to be at least 35% - 40% of current outstanding bank assets under an OBR workout?
Who gives a damn what a credit rating official or any other observer thinks - it's just too late when they finally report reality. 

Auckland does not crash because we are continuosly in an undersupply.
Unadulterated rubbish - if those with a mortgage liability fail to receive the income necessary to service a mortgage liabilty the bank's asset becomes impaired.
Stick to the conditions that might bring that about, with documented evidence - you continue to waste my time and definitely my money if your previous disclosures concerning your property leverage exposure are true.

Don't need your money. 
You are right. Banking systems don't want or need depositors while central banks are doing their thing, so you would be foolish to leave it in their system. That's a naked position if I ever saw one.
Tom Dick and Harry?
They're already doing it.

Fitch rating of Lehman in 2007 was? It  was AA moments before Lehman went bust, so why does Fitch have credibility?

Gareth Vaughn, Steven Hulme
Try this for another look-see and see if it has any applicability to the RBNZ
I ask that because RBA does a lot of the heavy lifting for the RBNZ

Not of much consequence iconoclast - the RBA just like the RBNZ needs to secure foreign reserves to meet short term emergency funding objectives if the foreign wholesale funders of excess domestic lending fold their tents O/N. Intervention is a luxury which can be avoided if it is just for the sake of posturing against G3 policy initiatives.
The capital of each of these institutions can be expanded in minutes by off-market Treasury Department creation of local sovereign debt securities placed on their respective balance sheets. Whether the domestic population has the wherewithal to service that debt is another matter - the expectations of that outcome influences foreign buyer's desire to further fund deficit financing antics, currently undertaken by both antipodean nations.

Here's a tidbit of a very fine submission back in witheld... any help on that..?
Finally, I suppose these supranational and large domestic bank issuers of these NZD & AUD Eurobonds take their cheap swapped floating currency loans to on-lend and facilitate the very types of productive urban infrastructure, you mention is necessary for New Zealand, in  other more deserving places than here.
As you will start to note we are fueling the fires of consumption with our current monetary and fiscal policy prescriptions, but in doing so we tend to have to destroy the furniture and eventually the house of our economy to do so. 

It was indeed Stephen, 2003... but nonetheless a gripping read of things to come. Any thoughts on reflection...?  
Yup  I delinked it hoping you'd recognise your own work.... a top man Gaynor, but they say that of cream don't they.
I've had the link in my assorted collections for a long while, but just stumbled on it last night doing some cleaning.......
a fine piece....cheers. 

Any thoughts on reflection...? 
Yes, 'they' cannot say they weren't warned - not that any notice was taken of such sound observations based upon my exhaustive experience gained in dealing/trading roles at London based multinational banks. Just another missed opportunity and waste of an education.

Well it has not been wasted altogether so m any things worthy of doing, not because the desired result can be achieved, but because somebody had to say /do something worth saying / least you least you did that.
 And somebody else heard..... Sincere Thanks for your efforts on the behalf of others. 

Thank you Christov.
The opportunity that went to waste was not my effort but the lack of regulatory action to preclude further predatory financial tactics that result in diminishing NZ citizen's long term welfare.

Your access to our unique content is free - always has been. But ad revenues are under pressure so we need your direct support.

Become a supporter

Thanks, I'm already a supporter.