Fitch Ratings says NZ banks' will be barely impacted by RBNZ's tougher new Basel III capital standards given they already meet them

By Gareth Vaughan

Credit rating agency Fitch Ratings says New Zealand's banks won't be sweating the Reserve Bank's incoming higher capital adequacy requirements, being introduced through the global Basel III reforms, given they already meet them.

Fitch says local banks "easily" pass the 4.5% common equity, 6% Tier 1 capital and 8% total capital thresholds. In fact their total capital ratios are nearer the 13% optimal total capital level the Reserve Bank identified in its Basel III cost-benefit analysis but won't be enforcing.

Total capital ratios, as of the end of June were; ANZ New Zealand, owner of the ANZ and National banks, 13.58%, ASB 12.6%, BNZ 12.72%, the Co-operative Bank 17.5%, Westpac NZ 13.6%, Kiwibank 11.3%, SBS Bank 14.77%, TSB Bank 15.23%, and Rabobank NZ 11.18%.

Under the Basel III rules, coming in from next year, the existing 8% minimum total capital ratio will have a 2.5% "conservation buffer" added to it, lifting it to 10.5% This buffer is designed to ensure banks maintain a buffer of capital over the minimum ratio requirements that can be used to absorb losses in times of financial and economic stress. Potentially, on top of this, a counter cyclical, or credit bubble, buffer of up to another 2.5% could be added at the discretion of the Reserve Bank in an attempt to slow a future credit boom.

"New Zealand's private-sector banks already meet the high capital requirements the Reserve Bank of New Zealand announced last week," says Fitch. "This means there will be little impact on their businesses."

"There may be a slight drop in private-sector banks' capital levels when growth returns and they expand their balance sheets to fund the rebuilding of Christchurch, although we expect the sector's focus on core funding to limit asset growth. The focus on funding was especially close at the major private-sector banks, which reduced their balance sheets in the wake of the global financial crisis, while Kiwibank Limited expanded its balance sheet aggressively," Fitch adds.

The credit rating agency also says the implementation of the new capital rules by January next year supports New Zealand banks' viability ratings, but it doesn't expect to take positive rating actions based on Basel III implementation because capital levels are already strong compared with international peers.

Developed by international body the Basel Committee on Banking Supervision, Basel III is a set of reform measures designed to strengthen the regulation, supervision and risk management of the banking sector in the wake of the Global Financial Crisis. It aims to improve the banking sector's ability to absorb shocks arising from financial and economic stress, improve risk management and governance, and strengthen banks' transparency and disclosures.

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