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On the heels of Fitch's warning, Moody's seeing more evidence that a number of risks faced by NZ's big banks are 'coming through the banking system'

On the heels of Fitch's warning, Moody's seeing more evidence that a number of risks faced by NZ's big banks are 'coming through the banking system'

By Gareth Vaughan

Moody's Investors Service says New Zealand banks face a number of risks and it's starting to see more evidence of these risks "coming through the banking system." And Standard & Poor's also says it remains concerned about New Zealand property prices, and the potential for a sharp correction in them.

The comments from the two come after Fitch Ratings, the third of the three major international credit rating agencies, said earlier this week challenges are increasing for New Zealand's major banks - ANZ, ASB, BNZ and Westpac - with strong asset growth and fierce price competition potentially leading to asset bubbles.

Moody's Sydney-based Financial Institutions Group analyst Daniel Yu told that Moody's continues to have a stable outlook on the New Zealand banking sector and on the individual big bank ratings. Yu said the banking sector was continuing to be supported by a moderate operating environment improvement, which was being assisted by reconstruction in Christchurch.

"That's a key supporting factor," Yu said. "(And) that steadily improving operating environment will also help support asset quality metrics and also the New Zealand banks have maintained very strong capital levels. That's a key positive for the sector."

The big four banks had an average tier one capital ratio of 11.6% at the end of 2012.

Nonetheless, Yu said Moody's sees a number of concerns and challenges for the sector.

"We do see the high level of household leverage as being a key risk. We would see the volatility of the agriculture sector to be a key risk and all the banks have sizable exposure to the agriculture sector," Yu said.

"Whilst funding profiles have improved over the past year or two as a result of slower loan growth and high deposit growth, we see that the improving operating environment could instigate some improvement in loan growth and funding pressures could therefore re-emerge for the sector. We also see competition as being a risk in terms of margins. Deposit competition has always been quite strong and this is likely to continue. But we also see potential for competition on the asset side to impact margins as well," said Yu.

Wholesale funding dependence a 'key constraint'

Moody's downgraded the credit ratings of New Zealand's big four banks by one notch to Aa3 from Aa2 in 2011. Yu noted that a key factor in the downgrades was dependence on wholesale funding. Moody's estimates the big four, on average, source 37% of their funding from wholesale - both short-term and long-term - sources, with this including money sourced from their Australian parents.

"In all our research we continue to highlight that the New Zealand banks' level of wholesale funding is a key constraint on the rating," said Yu. "They (the banks) have improved their position (since 2011), but even with this improvement, the banks' levels of wholesale funding is still a key concern."

In January Moody's highlighted that, at more than 140%, the New Zealand banking sector has the highest loan-to-deposit ratio out of 13 Asia-Pacific countries. Of the big four banks, S&P figures as of December 31, put ANZ's at 135.9%, ASB's at 136.6%, BNZ's at 162%, and Westpac's at 147.4%. Kiwibank's was 109.9%

Meanwhile, Yu said the Reserve Bank's potential use of macro-prudential tools, and possible move to increase the amount of capital the big four banks must set aside to cover potential losses from high loan to valuation ratio home loans, in attempts to slow credit growth, were both positive initiatives for the banking sector.

Nonetheless Yu said; "The sector faces a number of risks and we are starting to see more evidence of these risks coming through the (banking) system. So it is certainly something that we are monitoring closely. But at this stage we still have stable outlooks on the banks (ratings)."

S&P's property concerns

S&P issued a report in February warning New Zealand and its banks are vulnerable to a sharp correction in property prices.Its base case scenario was, however, for real estate prices to stabilise at current levels over the medium-term, with this having a stabilising effect on asset quality ratios. However, yesterday the Real Estate Institute of New Zealand (REINZ) reported a record high national median house price of NZ$400,000 for March, with the 8,128 houses sold in the month being the most in any month since May 2007.

Nico DeLange, a Sydney-based credit analyst at S&P, told -before the latest REINZ figures were released - his firm remained concerned about New Zealand property prices.

"We are highlighting that might impact our assessment of economic imbalances and we are also highlighting that might put pressure on our economic assessment, which (in turn) might put pressure on the stand alone credit profile assessment of individual banks," DeLange said.

S&P was also seeing signs the risk appetite of New Zealand banks is increasing.

However, in a position similar to Fitch's, S&P says the big four New Zealand banks are core subsidiaries of their Australian parents, with their credit ratings equalised with those parents. Fitch's Sydney-based senior director Tim Roche told that despite Fitch's warning over the increasing challenges being faced by the major banks, their credit ratings are in no immediate danger of downgrade.

Fitch has the big four banks credit ratings at AA- with stable outlooks, as does S&P. Moody's still has then at Aa3, also with stable outlooks See credit ratings explained here.

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"In January Moody's highlighted that, at more than 140%, the New Zealand banking sector has the highest loan-to-deposit ratio out of 13 Asia-Pacific countries.    S&P figures as of December 31, put  Kiwibank's at 109.9% ANZ's at 135.9%,  ASB's at 136.6%,  Westpac's at 147.4%  BNZ's at 162%, "   Since it is the responsibility of the depositor to evaluate the risk of depositing with each bank (rather than depending on the RBNZ) - is it a good assumption to use the loan-to-deposit  ratio to judge the risk for each bank?   Or is there a better measure?

Bottom line billsay, is all the above are in the proverbial, including our deposits, if the lending above the deposit base, which in most cases is funded by foreign wholesale short term loans, suddenly are not renewable, as was the case in 2008.


I urge you to read the first linked article below and after taking stock of reality immediately take action to petition your local MP, bank and the RBNZ.


Here's the encyclical as presented to the House of Commons
 Loan-deposit ratio above 100% is like (untreated) AIDS. As it progresses it weakens the immune system of economy that safeguards against adverse events: natural disasters, wars, etc or sometimes unpredictable mood swings of market players. The current crisis was triggered by the collapse of subprime mortgage market (effectively overvaluation of assets). This time the system, for years having had been weakened by loan-deposit ratio above 100%, also collapsed altogether. It was a giant pyramid and it was bound to crumble anyway (for whatever direct cause). It was like a human suffering from AIDS whose death was not caused by AIDS directly, but by pneumonia, flu, infection, etc. However it is AIDS that made the curable illnesses lethal.
Until recently the world enjoyed a sustained period of high growth and low inflation and the fact that it came to such an abrupt end does not come as a surprise. It was in the very nature of the pyramid scheme mechanism. The deposit creation process with a ratio above 100% guaranteed impressive-looking economic growth figures. At the same time there were no extra cash hitting Main Street, as there was no extra cash printed. In this context, the high growth of property prices is no surprise. In their huge majority and extent, these are, in practice, cashless interbank transactions. The world stayed oblivious in this economic miracle like customers of a pyramid scheme being happy with the figures on their statements until they wanted to withdraw money. But like with any pyramid scheme, the financial system ran out of cash, with the outcome of a lack of liquidity, not high inflation.
How long before the RBNZ suffers  the ignominy of printing our way out of trouble. The nonsense that John Key offered us today as consolation, is just that. 
Let's drop this OBR rubbish as quickly as possible - the RBNZ should actively curtail the risky actions of local bank management rather than planning to let innocent depositors take a fall after the fact.


Hi Billsay

I hade hoped that some of the wise men would have offered their opinion on your question.

I believe that it is only one of at least 4 things to look at.

I further believe that the big 4 rely heaverly on their Aussie parents ratings etc, and question weather if thing got really tough in Australasia, they would leave their subsidery to flounder

especilly under OBR



As you suggest, under OBR things will be different, and a possibility is that the Aussie banks would let OBR run its course - since they have A$250,000 deposit insurance for their Australian customers to consider - and the inverse in NZ with the depositors expected to take a haircut to keep the NZ subsidiaries viable.  The unintended consequences of OBR are the consequences to be wary of.




In response to your question about Australian Bank subsideries I will share this.

In 2008, with Bear Stearns and Lehman Bros swirlling down the toilet bowel i had TD's with ANZ, Port Vila, Vanuatu Branch.

No one there, from the manager down could tell me wether they were a branch or subsidery.

It was a big difference as AU had just initiated the Guarantee scheme.

If in doubt, then get out.