Fitch Ratings says New Zealand's high household debt and a low national savings rate could pose a risk to the financial system if asset prices decline or if the unemployment rate increases.
The credit rating agency says challenges are increasing for New Zealand's major banks - ANZ, ASB, BNZ and Westpac - with strong asset growth and fierce price competition potentially leading to asset bubbles.
"This in turn may impact bank financial strength and place negative pressure on Viability Ratings (VR)," Fitch says.
It also says potential asset quality pressure could contribute to weaker future earnings, and ultimately impact capitalisation.
"In addition, New Zealand's property market has seen strong house price inflation and credit growth - particularly in higher loan/value (LVR) mortgages - in the past 12 months, while leverage remains high in some segments of the agriculture sector which could leave bank asset quality susceptible to weather-related events such as drought."
Nonetheless Fitch says the banks' current strong capitalisation and impairment reserves, and healthy operating profitability provide a buffer for a moderate house price correction. It says "significant deterioration" in these measures is only likely after a material housing or economic downturn.
Household debt-GDP & savings-GDP 'weak'
Fitch says although New Zealand's household debt/Gross Domestic Product ratio and savings rate/GDP ratio have improved since 2007, at 143% and -0.1%, respectively, they're still weak compared with other developed countries. It also notes that around 30% of new lending is being done at loan to valuation ratios (LVRs) in excess of 80%, which could pressure asset quality if house prices fall significantly and unemployment (currently 6.9%) rises.
The latest Real Estate Institute of New Zealand figures show the national median house price rose 7.6% to NZ$382,000 in the year to February, the Auckland median price rose 14.3% to NZ$535,000, and the Stratified Housing Price Index reaches new record high of 3,544.9. The latest Reserve Bank sector credit data shows agricultural sector debt reaching NZ$50 billion for the first time, and housing loan growth of NZ$700 million to NZ$179.38 billion in February, up 4.3% year-on-year, was the highest rate of increase since December 2008.
Fitch also highlights the funding profiles of the major New Zealand banks.
"Funding profiles remain weaker than international peers, with the system still reliant on offshore wholesale markets. Loan/deposit ratios are in excess of 130%," says Fitch.
Fitch notes that in an attempt to address some of these issues, the Reserve Bank of New Zealand is consulting on measures to strengthen its macro-prudential regulation.
"Any additional regulation which limits the creation of asset bubbles, and ensures strong banking balance sheets will be viewed positively by Fitch."
Optimism on macro-prudential tool impact; Sees higher loan impairment charges
The credit rating agency suggests the proposed macro-prudential tools, including potential caps on high LVR mortgage lending, should strengthen the banking system's capital and funding positions, if implemented. The big four banks currently have up to 26% of their home loans at LVRs above 80%.
Meanwhile, Fitch expects the New Zealand banking system to remain one of the more profitable in the developed world, with its strong - although declining - net interest margins and efficient cost management. Reserve Bank data shows registered banks had a combined net interest margin of 2.28% as of September last year, up from 2.27% in June but down from 2.29% in March.
"Fitch expects the major banks to announce margin compression and higher loan impairment charges for collective provisioning given the rapid and competitive loan growth since mid-2012. Loan impairment charges could rise significantly over the next three years if asset quality were to deteriorate as a result of the strong loan growth. A sound economic environment and softer house price inflation, however, could limit specific loan impairment charges,' says Fitch.
Fitch currently has 'AA-' ratings with a stable outlook on all of ANZ, ASB, BNZ and Westpac. These are their long-term foreign currency ratings. Fitch has 'a' viability ratings on all four banks. Combined the four hold 85% of New Zealand's mortgage assets. See credit ratings explained here.
(Update adds additional detail).
25 Comments
New Zealand's major banks - ANZ, ASB, BNZ and Westpac are not New Zealand's. They are AUSTRALIAN.
As we have said before, when we call our bank account manager, its not incommon for him to be in Melbourne/Sydney, and he happily calls us from there.
ANZ, ASB, BNZ and Westpac. Combined the four hold 85% of New Zealand's mortgage assets.
And also as said before, all profits go to Australia to help the same banks there, including insuring that the same banks are able to guarantee A$250,000 per depositor per bank.
All risk in NZ (thanks to RBNZ) is now held by NZ bank depositors who have no deposit insurance.
Can you imagine the outcry if the banking system here was monopolised by US banks, or Chinese banks? It wouldn't be allowed - or if it were they would be required to be run more prudently in regard to risky lending for residential property.
What does it mean? It means that the bank owners have the support of NZ taxpayers, the NZ central bank, and the NZ government to help deliver profits. For bank shareholders, it's a no-brainer....kind of. The difference that it makes is that the shareholders can bail out and the banks can protect their asses, leaving ultimitately the taxpayer carrying the can.
Forget shareholders, think management and board its CONTROL. Who makes the descisions over who to lend to, what products to offer and at what rates/risk to take..... Once NZ borrower exposure amount go high enough, the lending decisions are made in Oz
The top Melbourne/Sydney exe's do not regard NZ better than they. They are focused and motivated on issues in NSW, Victoria, QLD, WA etc.. (then maybe NZ) and they pay attention to the RBA the Oz Treasurer and the ASX.
Effectively our banking system is on loan from the Australians... in OHO...
Sorry, H_T, but this does not really answer my questions.
The banks' "focus and motivation" is first and foremost profit and in this there's no difference between an "Australian" bank or a "NZ" bank. It is hard to see what meaning these terms carry and what real difference they make anyway.
It means when they get into trouble they will cut off lending here before they cut it off at home. Banks regularly get into trouble and when they do they have to reduce their loan books. It works like this, one week you can borrow as much as like to buy a house or farm, the next week you cannot borrow anything. They do not say "Look we are broke, we don't have any money" they just say the bank lending policy has changed.
For example ANZ may decide they want to have less exposure to NZ as a % of their total lending. So they just stop lending to new customers for a year or two.
I would also contend that the bank management's primary concern is career risk, not profit as you suggest.
I will agree with the last sentence of yours RW.
As to lending, if a "New Zealand bank" with a subsidiary In Australia found that, for business / commercial reasons, lending in NZ did not make sense for a while, they’d stop lending in NZ just as an “Australian bank” would.
There’s very little meaning to these terms it appears.
Here is the Fitch release:
http://www.fitchratings.com/creditdesk/press_releases/detail.cfm?pr_id=…
Fitch put in the line:
They are all owned by major Australian banks and together hold a market share of 85% of New Zealand's mortgage assets.
to add the context we were suggesting atop.
We don't think it is black and white as you imply. We maintain that a NZ Bank and an Aust Bank are different in many ways. Example
One: The way they pursue that profit motive.... We suggest the OZ banks have form (re the tax settlement they had to enter into over the convert bond funding structures).
http://www.interest.co.nz/news/41294/westpac-loses-nz961-mln-tax-case-m…
Westpac has lost its NZ$961 million tax avoidance case at the High Court regarding 'structured finance transactions' the bank made between 1999 and 2005. (Update 4 includes IRD comments)
The Commissioner of Inland Revenue said "the purpose or effect of the transactions or parts of them was tax avoidance", with the NZ$961 million consisting of Westpac's tax liability from the transactions of NZ$586 million and interest of NZ$375 million.
This is the second High Court ruling on the structured finance transactions, with BNZ earlier charged NZ$661 million on transactions it undertook before they were stopped in 2005. ANZ, ASB and Rabobank also face cases brought against them by Inland Revenue.
Two the volume of profit pursued (they were not that smart to not need govt support) and Three: The structural funding problem.
http://www.rbnz.govt.nz/speeches/4487002.html
Nevertheless, one point needs to be made clearly. When the crisis did hit, the banks did require public sector support. The Government implemented both retail and wholesale funding guarantees to preserve confidence in the banking system, while the Reserve Bank expanded its liquidity facilities in order to ensure that banks remained liquid and well-funded. The financial crisis revealed a major limitation in the banks’ business model that lay behind the rapid expansion in credit during the lead-up to the financial crisis – a tendency to fuel much of that lending primarily through short-term wholesale funding from offshore. However, unlike banks in the Northern Hemisphere, the banks’ own capital buffers proved sufficient to absorb the rise in non-performing loans and accompanying decline in profitability that followed from the economic slowdown.
Four: Size of profit now. We would suggest as Fitch does (healthy operating profitability) that greater than normal profits are being extracted by the banks as risker borrowers (eg high lvr) regard the funding as yes/no rather than looking at price/margin.. in a race for credit growth, bank profit, shareprice maintenance, exec bonus...
This gets to our thing, with Oz banks so dominant, where they see a lending opportunity, they blitz it with off shore money, where as there is no requirement for NZ to save or plan for retained profits. any money made/spare is geared up again. SO, you say. Well this menas that loans need never be repaid (agri-lending) as the banks say, you don't need to repay the loan, cause we (the bank) will just re-borrow offshore..... as they have moved from a safe-keeper-of-your-cash, to a role of extracter of fees & margin...
Well this menas that loans need never be repaid (agri-lending) as the banks say, you don't need to repay the loan, cause we (the bank) will just re-borrow offshore..... as they have moved from a safe-keeper-of-your-cash, to a role of extracter of fees & margin..
A nation of net debtors, both domestically and internationally, precludes any other model of operation.
But as you note the foreign sources of short-term wholesale funding will be the first to initiate systemic default with either 'after the fact' panic withdrawals or by prior arrangement with the regulator- much like German banks exited Cyprus ahead of time- thus guaranteeing a collapse of the rump.
This is the first of the alarm bells startining to ring.
Time to review, and maybe time to put pressure on GOVT to review off shore banks, covered bonds,guarantees,etc
I believe it is time to spreed your money arround all the banks even some of the NZ banks.
They are more directly controlled by the reserve bank.
KevinR
Q: Why have you not yet done something like it?
Take a 3 day weekend to Syndey, before catching Monday afternoon flight open one or more accounts with (any of the 4) and activate internet banking/talk nicely for a NZD acc.....
Usual stuff, including international transferrs from your browser etc...
And fall within the $250k dep insurance. down side is that fees are higher...
http://www.canstar.com.au/term-deposits/government-deposit-guarantee/
The Australian Government has announced it is reducing its guarantee on bank deposits to $250,000, effective from 1st February 2012. This permanent deposit guarantee scheme replaces the emergency scheme which covered deposits up to $1 million and was introduced in 2008 at the height of the global financial crisis.
The initial emergency scheme was designed to prevent any panic runs on Australian banks during the financial crisis by providing reassurance to depositors that their money was safe. The expiry date for the existing cap was next month. Credit unions, building societies and banks now have four months to prepare customers for the lower cap and
adapt their own funding plans if necessary.
According to Treasurer Wayne Swan, even at the new cap, the scheme would still protect the savings held in 99% of deposit account numbers in Australian-licensed banks, building societies and credit unions.
It will ensure that we continue to have one of th
e most generous and secure deposit insurance schemes in the world, Mr Swan said.
http://www.commbank.com.au/personal/accounts/managing-your-accounts/min…
http://www.commonwealthprivate.com.au/personal/private-banking.html
This will help
Bank Accounts in Australia
The 100 Point Check System
http://en.wikipedia.org/wiki/100_point_check
Opening a Bank Account in Australia
http://www.australianaustralia.com/page/Opening_a_Bank_Account_in_Australia/190
Banks will lend to market capacity and then sit on it:
NZ is relatively safe unless unemployment was to become an issue
Effectively enslaves Home owners and farmers who have borrowed heavily, tying them to years of interest payments.
Only way out is to quit job declare bankrupt, sell house or farm, lose equity and start again.
So 20% equity in 400,000 house = $80,000 savings loss or 20 years as a slave??
that only works out at a cost of $4000 per year loss, so just move to aussie.......
Market will probably drop the 20% controlled by the banks with their lending effectively gobbling up people equity who want to get out.......
My advice, sell now, sell fast and get your equity folks
Any New Zealander who invests for retirement should have a broad range of investments. As we all know too many of us just consider property in New Zealand but in doing that we miss out on opportunities that are available all over the world. Look at the US share markets and how they have performed in the last two years. Putting some currency overseas and buying overseas assets for long term investment purposes has certainly been very profitable for those who have invested in the last two years or so even with our dollar rising against the US dollar. One day the NZ dollar will fall back to reality and those who hold overseas investments will benefit. As I said look outside the square and consider investments other than property as every dog has his day.
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