David Chaston details the key news overnight in 90 seconds at 9 am in association with Bank of New Zealand, including news that international ratings firm Moody’s has placed all four major New Zealand banks on review for a possible downgrade. And it has done that because it has taken the same action on each of their Australian parent banks.
Moody’s have specific concerns. These banks all currently have an Aa2 rating, similar to Standard & Poor’s AA rating, and are among a relatively small group of banks worldwide with investment grade credit ratings.
What is apparently worrying Moody’s is that, as the world changes and long-term interest rates rise, this may damage these bank’s balance sheets and earnings.
They say they are concerned about “structural sensitivities to wholesale market conditions”. The global financial crisis has underlined the speed with which shifts in investor confidence can impact bank funding, and wholesale funds comprise on average 43% of total liabilities of these banks.
Recently, the Reserve Bank gave these trading banks the ok to issue up to 10% of their liabilities as covered bonds. The banks have been piling into them – in fact it caused the Australian regulator to lift a ban on them over there. Covered bonds are essentially issued to foreigners in the wholesale market, building the exposures that concerns Moody’s.
The consequences for us? Market signals indicate that long term interest rates are on the rise, and if Moody’s do downgrade the banks, they will have to pay more for their funds, and that will be on top of the market rises that are coming anyway.
That will be good for local investors, who will see returns rise, but not so good for borrowers. Maybe homeowners with a floating mortgage won’t be affected immediately, but business borrowing will see early increases if credit ratings are dropped.
And if the banks are vulnerable to “wholesale market conditions”, the $1 billion extra per month the Government is borrowing will be subject to the same vulnerabilities.