Credit ratings agency Fitch sees little impact from LVR limits but says some banks may have their profitability squeezed

Credit ratings agency Fitch sees the newly applied "speed limits" on high loan to value lending as having a "limited" impact, but believes banks may see their profits squeezed.

The Reserve Bank has decided to limit residential mortgages with a loan-to-value ratio (LVR) in excess of 80% to no more than 10% of new loans from 1 October 2013.

Fitch director of financial institutions/international public finance Andrea Jaehne said the move would "buy time" for the stability of the NZ banking system.

"However, the impact is likely to be limited in scope and duration, as monetary policy settings remain accommodative."

Jaehne said while the policy might lead to some reduction on house price pressures,  the tightening of lending conditions implied potentially greater competition for lower-LVR mortgages, "mitigating the overall impact".

"This could pressure the net interest margins and operating profit of several banks. Lenders will be able to widen margins on some higher-LVR loans, although these mortgages will also require more capital from September."

Jaehne said the recourse to macro-prudential measures to help protect the country's financial system highlighted the constraints faced by the RBNZ in raising interest rates.

"Any hikes in interest rates could attract further foreign capital inflows at a time when the New Zealand dollar is already near its record highs (since 1990) in nominal and real trade-weighted terms. Loose monetary policy could see credit eventually find its way into the system through other channels, lessening the impact of the LVR limits over time."

Jaehne said since almost a third of the new lending in recent months has been in mortgages with high LVRs, the forthcoming macro-prudential measures should limit the negative impact of any house price volatility on banks' asset quality and capital.