By Gareth Vaughan
If there's one thing you can count on every time one of the major international credit rating agencies issues a report on New Zealand's big, Australian owned banks it's a comment flagging concern about a dependence on offshore wholesale funding.
The most recent such report, Moody's outlook on the New Zealand banking system issued on July 30, was no exception.
"At 29% of total funding, with a sizeable foreign component, the banks’ reliance on wholesale funding remains a key sensitivity, despite the current strong debt market conditions," Moody's said.
With the global financial crisis (GFC) and the Reserve Bank's introduction of the core funding ratio in 2010, the big New Zealand banks' reliance on offshore wholesale funding has been reduced. Figures issued by ANZ strategist Carrick Lucas last December showed New Zealand banks' offshore funding down $36 billion, or 25%, to $106 billion since the GFC.
But there's only so far it can drop given there's a limited pool of domestic deposits and, as of March 31, the big four banks held 97% of them, according to Moody's. So does the credit rating agency have a threshold that, if the big four banks reduced their wholesale funding to, it would no longer be regarded as a "key sensitivity?"
I asked Moody's Sydney-based assistant vice president and analyst Daniel Yu this question.
"We do not have a set level when reliance on wholesale funding would stop being a concern. This is because there are quite a few factors we look at, in addition to the level of wholesale funding, when we assess a bank’s funding profile," Yu said.
Things Moody's looks at include tenor of wholesale funding, concentration of maturities, the proportion of wholesale funding that is sourced offshore, and the level of liquid assets available to cover maturities.
In terms of the actual dollar amount of wholesale funding, Yu said for a point of reference, Moody's doesn't mention reliance on wholesale funding as a key concern for Kiwibank, which is about 16% wholesale funded.
"Furthermore, compared to the major banks, Kiwibank is much smaller so the dollar amount of that 16% is relatively small," said Yu.
I also asked Yu whether Moody's can see a way New Zealand's big banks could overcome their reliance on wholesale funding.
"This reliance on wholesale funding is a structural issue. New Zealand has consistently reported a large current account deficit, which is largely funded by the New Zealand banks," said Yu.
The introduction of Australian style compulsory superannuation wouldn't solve the issue, given compulsory super has been in place across the Tasman since 1992 and the Aussie parents of New Zealand's big four banks have a similar dependence on wholesale funding. Super funds invest in a broad range of asset classes, rather than merely bank deposits, both domestically and overseas.
The Moody's chart below represents the dollar amount of wholesale funding the banks have relative to their holdings of liquid assets.
"On average, this ratio is around 15%. A positive number indicating that wholesale funding is greater than liquid assets for the New Zealand banks," said Yu.
*Moody's has long-term Aa3 credit ratings on ANZ, ASB, BNZ, Westpac and Kiwibank, all with stable outlooks. See credit ratings explained here.
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