By Bernard Hickey
Ratings agency Moody's Investors Service has downgraded the credit ratings of New Zealand's four biggest banks, ANZ National, ASB, BNZ and Westpac, by one notch to Aa3 from Aa2 because of New Zealand's subdued economy and the banks' exposure to wholesale financial markets for funding.
Last week Moody's downgraded the parents of these four banks, ANZ, CBA, NAB and Westpac, by one notch to Aa2, also because of their exposure to volatile international wholesale markets. See Gareth Vaughan's earlier article here.
Moody's noted the exposure of New Zealand's banks was less immediate than their Australian parents because credit growth was slower and therefore funding needs were not as marked.
"The 1-notch downgrade of ANZ National, BNZ and (Westpac NZ) WNZL's (Bank Financial Strength Ratings) BFSRs reflects the ongoing impact of the challenging economic environment in New Zealand, which has resulted in asset quality metrics continuing to deteriorate -- albeit at a slower pace -- beyond minimum expectations for the banks' ratings at the bottom of the credit cycle," Moody's said.
"The local economy remains subdued, with GDP growth now forecast to show stronger growth in the year to March 2013, a year later than forecast last year," said Marina Ip, an Assistant Vice President based in Moody's Sydney office.
"ANZ National maintains a concentration in rural lending, whilst WNZL has a concentration to commercial property, both sectors are experiencing stress. Although BNZ has a diversified corporate loan portfolio, the bank does have relatively high single name borrower concentrations due to its higher proportion of corporate/institution lending. ASB's BSFR has been confirmed at C+, 1-notch above the C BFSRs of ANZ National, BNZ and WNZL in recognition of its stronger credit risk profile which has resulted in lower non-performing loan metrics compared to its New Zealand peers," Moody's said.
"The bank also has a higher proportion of customer deposits compared to the other New Zealand major banks, leaving it less reliant on wholesale funding," it said.
"Recent natural disasters have devastated parts of the country, with GDP expected to be low in the year to March 2012. A stronger recovery is now expected in the year to March 2013 and will be aided by rebuilding activity in the Christchurch region, which will attract domestic and international investment relating to insurance payments and the government backed earthquake commission. Funds to support the reconstruction will be largely sourced from reinsurance obtained from outside the economy and hence these will provide a genuine boost to activity. "
"New Zealand major banks are structurally sensitive to wholesale funding market conditions. The major banks have around 40% of their total funding base sourced from wholesale funding, with around two-thirds of this being sourced offshore. Over the past 6-months, the major banks have enjoyed relief in funding pressure due to slower loan growth and higher customer deposit growth. The increased savings rate was supported by lower credit and consumption growth combined with moderate income growth. "
However, Moody's said it believed this was not sustainable in the long-term.
"The major banks are making concerted efforts to reduce reliance on short-term offshore wholesale funding, as evidenced through the large reduction in USCP over the past 6 months, as well as the longer average maturities of their wholesale funding profiles which were achieved through the issuance of longer-dated New Zealand government guaranteed issuance during 2009-2010. Despite recent improvements in wholesale funding reliance, a significant shift in the bank's funding profiles towards customer deposits is restricted by New Zealand's limited customer base", added Ip.
"New Zealand has a population of around 4.3 million which is growing at only 1% per annum, placing a ceiling on retail customer deposit growth. Corporate and institutional deposits are also limited due to New Zealand's smaller economy. The issuance of covered bonds (up to the regulatory limit of 10% pledged assets to total assets) will diversify the banks' wholesale funding and further lengthen the bank's average funding maturity. This is a credit positive, so long as the overall reliance on wholesale funding is not increased. "
"We expect that in case of need, support for the New Zealand major banks would primarily come from their Australian parents. All four banks have entrenched franchises in New Zealand, stemming from operating in the country for over a century. In addition, we view the close working relationship at both a regulatory and political level between Australia and New Zealand to increase the likelihood that parental support would be forthcoming" Ip said.
ASB Treasurer Nigel Annett said ASB acknowledged the issues raised by Moody’s and ASB was focused on maintaining prudent liability levels and reducing the Bank’s reliance on wholesale funding, particularly short-term borrowings.
Annett said only one-third of ASB’s funding was sourced from wholesale markets and ASB had significantly grown its local retail deposit base.
BNZ Treasurer Tim Main said the one notch reduction was expected given the structural reliance of both Australian and NZ banks’ on overseas wholesale funding.
“Access to offshore funding will be more challenging, and the cost of funding will increase, and this is a global trend that all banks have had to adjust to. The rating announcement however will not materially impact our access to wholesale funding given our continued very strong capacity to meet our financial commitments," Main said.
“The strong message here is that as a nation, New Zealanders need to save more, and be less reliant on overseas borrowing," he said.
(Adds ASB comments, BNZ comments, videos of interviews on TVNZ)