Standard and Poor's says NZ big bank credit ratings depend on on-going strength of Aussie parents; Some 'upside potential' for a few ratings

Standard & Poor's has hinted strongly that New Zealand's big four banks' AA- credit ratings won't face any downgrades this year unless their Australian parents strike significant problems.

In a report on New Zealand banks entitled Moderate economic recovery and support from Australian parents underpin a benign outlook, credit rating agency S&P says its ratings on the vast majority of New Zealand banks are on stable outlooks, reflecting an expectation that very few ratings are likely to change in 2012.

S&P's report comes after it downgraded the big four - ANZ New Zealand, ASB, BNZ and Westpac NZ - by one notch to AA- in December as part of a revamp of its rating methodology. The big four's ratings are the same as those of their Australian parents.

"The outlooks on the four major banks remain linked to those on their respective parents," S&P says. "Although unlikely in our opinion, potential triggers for a downward rating action on the four major banks could be a significant weakening in the rating on their respective Australian parents, or our assessment that their support to the New Zealand banking subsidiaries has significantly weakened."

It says the stand-alone credit profile of the big New Zealand banks, and the smaller banks, remains exposed to disruption in the banking sector's access to funding, given a "material dependence" on offshore borrowings.

"Although we consider such a disruption unlikely given the past record, plus our assessment of expected support from the government and the Australian parents, we note that such a disruption could occur due to a variety of events, such as a New Zealand bank-specific factor, a New Zealand banking-sector wide factor, or dislocation of global financial markets," says S&P.

In its Monetary Policy Statement last week the Reserve Bank said long-term wholesale debt accounts for about 20% of banks’ total funding. The central bank also noted banks raised NZ$7 billion more through deposits during 2011 than they grew lending by, reducing the need for them to actively seek long-term wholesale funding at expensive levels.

Meanwhile, S&P says it expects credit losses to remain relatively low by international standards, reflecting its belief a New Zealand economic recovery will last through 2012, and that it will remain supported by the global economy and New Zealand's commodity exports.

"Nevertheless, we consider that there is a risk of increase in credit losses in a downside scenario, driven mainly by the agricultural, SME, and commercial property sectors, although the residential mortgages form about 60% of total banking sector loans in New Zealand. This is because we understand that these sectors within the banks' corporate loan book are the main sources of the relatively high non performing asset level. "

There's some "upside potential" for a few New Zealand bank ratings stemming from stronger forecast capital and earnings than currently expected by S&P.

"Additionally, ongoing consolidation in the sector could benefit some of the smaller financial institutions, if any mergers result in formation of stronger entities, in our opinion," S&P says.

The credit rating agency expects New Zealand Gross Domestic Product (GDP) to grow by 2.7% in the year to March 2013, following 2% growth in the year to March 2012, due to strong commodity prices and reconstruction activity following the Canterbury earthquakes.

S&P also notes the ratio of domestic private sector debt to GDP fell in 2011 to 145%, from 151% in 2010.

"Additionally, similar to our expectation for the banking systems in many other developed economies, we expect earnings to remain under pressure from likely tightening interest margins. We believe this to be driven by increasing regulatory liquidity and capital requirements, as well as the increasing funding costs in the context of the New Zealand banking system's material dependence on wholesale borrowings."