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A relatively low level of credit losses should continue over the next two to three years underpinning the strong profitability of New Zealand's major banks, S&P says. Nonetheless downside risks are seen.
S&P also warned of the potential for, and damage from, a sharp drop in NZ house prices in 2014 and 2013.
"We believe that persistent house price inflation notwithstanding low credit growth could further heighten the risk of a sharp property price correction sometime in the future, particularly if there is an external shock to the economy that increases the risk of the banks incurring higher credit losses," says S&P.
"Consequently, we consider the stand-alone credit profiles of banks and credit unions in New Zealand as remaining subject to negative pressures, as reflected in a negative rating outlook on a number of these banks and credit unions. We are also of the view that the banking sector's high dependence on net offshore borrowings that fund about 30% of domestic customer loans, and limited support from core customer deposits, which fund only about 49% of domestic customer loans, remain key weaknesses for New Zealand's banking system." My emphasis. Read more
Since foreign wholesale lenders and covered bond owners are exempt from the provisions of OBR it falls to the core customer depositors to underwrite nearly 100% of banks' assets in the event of default..They don't tell you that at school or when you sign up to be an unsecured creditor, do they?
Yes but what S Hulme is alluding to is the fact that very few depositors know that OBR does not give the depositor enough of a buffer before they get a large haircut in the event of bank stress, and this has not been publicized or stressed enough; indeed it is concealed from all but the most insightful.
Any fool knows if you drive a car it could crash, but few realize that with 3-4% on deposit the reward they are getting incurs disproportionate risk, as the banks are speculating on property price rises at the risk of the buyer and the depositor, not at the risk of the CEOs of the banks.
Normally with low return goes low risk, but you are not getting the low risk you think you are.
And the consequences of a 15% property price fall would stress every NZ bank more than you might think, because NZ banks have a high leverage high risk profile by international standards.
As NZ property prices are very high relative to household incomes the risk of a correction is high.
Under law ignorance is no defence. The OBR is nothing to do with being a buffer, in fact it makes it crystal clear that the assumption that bank deposits carried a Govn guarantee is mis-guided and risky. I dont agree on it being concealed. My parents attend U3A and its a not in-frequent talking point amongst OAPs, they get it alright. I dont disagree that the 4% you are getting is not reasonable for the very probable default, so really move your money now. BTW banks refuse to take out depositor insurance, why is it that depositors leave their money there then? I dont disagree that the CEOs etc will not take responsibility what do you suggest? we hang a few? I do not think the drop will be as small as 15% btw, more like 50%. Where did you get the 15% from btw? I am interested on how you calculated that %. Is it a guess or is there a basis? I dont disagree on the 15% as my "guess" is similar (20%) ie its also in about that order.
On top of the risk just note that it is only some areas of Auckland that are huge bubbles but these seem to be cash rich (or overseas debt), so I wonder really if a pop in these will effect NZ banks that badly, if it spreads, well yes.
Just to go back to my favourite topic, peak oil, the debt is under-written by the assumption that we can grow world GDP for ever. That means that there will be the fossil energy there to do it, that is clearly not the case, ergo its isnt under-written, ergo its going to pop and be a huge mess.
Last thing why should tax payers carry the cost of a default?
No...and yes... Steven.... Why do you think the Reserve Bank exists in the first place..????? The whole Banking system is a Public/private Sector partnership.
The Reserve Banks ONLY reason for existence is to maintain Financial Stability and also to maintain the confidence, integrity and value of our Money. That is their job.... the Reserve Bank is who the ordinary person is supposed to trust in..
The OBR is a travisty ...in my view.. ..and the unintended consequence will be that a problem with one bank will spread overnight to all Banks as People withdraw their deposits.....
a) Why should I the tax payer bail out one specific sub-set of investors? especially as that subset is either incompetant or others like a few in here who are using the system to protect their wealth knowing full well what is going on? and indeed what they helped create?
b) The very idea that you can withdraw your money at a moments notice is the ammunition you have to be a master of your own finances.
c) trust? LOL it is the free markets, Govns and the financial sector who are or have created this monster. The RB is the poor bastard left trying to hold it together.
Yes Stephen, I also have never understood the negative sentiment here about the OBR. Why should anyone expect others to bail them out if they put their funds into a bank that gets into trouble. Why should anyone think that their lack of financial nous, or interest in basic finance, should warrant other taxpayers bailing them out - ignorance is ignorance and costs you in many things in life, and finance is no different. Is putting funds on deposit with whatever bank you choose more complicated than say making a financial mistake with the biggest purchase of your life, a house. No, and I'm not bailing them out of that either.
Whilst I very much agree with the whole personal responsibility mantra there are many issues which go way beyond what the average person is capable of understanding or taking action on......an OBR is actually about a sub-set of investors who will be protected at all costs and that is the borrower.......
The OBR policy is much the same as Governments seizing private gold assets.
An OBR does nothing more than bail out people who took on debt.......all mortgage holders who have pushed in particular property to crazy prices get bailed out by using unprotected depositors funds these RBNZ bailed out people then just have to sit back and wait until property increases in price again and no loss incurred, while the depositor is most likely ruined for many years.
The OBR policy directs people to borrow as much as they can and buy property as people with debts will be protected to stop as much as possible any decline in prices...it is the drop in prices which creates financial instability.......leveraging everything you can into property is the safety net granted by the bureaucrats....the RB is hardly the poor bastard left trying to hold it together......everything is going nicely and everyone in the bureaucracy knows where the loopholes are and how they can best look after their own personal wealth.
What I can see is lots of ppl do indeed understand the OBR and they are frightened that they now have no where to put their money that is "safe". ie moral hazard was or has been reduced, before the investor assumed that the tax payer and indeed ffuture atx payer would protect their capital.
I dont agree on the OBR being similar to gold confiscation. With one OBR the investor takes the losses for their private investment decisions, for the second I do indeed consider it wrong for a Govn to take your gold. Q is whether they would also do the same for other precious metals and gems.
No the OBR bails out the tax payer from having to cover the capital for others free of charge. It does not protect the mortgagees at all, it is a full recourse loan, the OBR has not changed that except if they are also tax payers. Or can you prove otherwise?
The OBR does no such thing on borrowing ie safety net to debtors. Now I'd semi-accept that low interest rates do this, but only if ppl are greedy and dont care or understand the impact of a price collapse. The OBR actually protects the tax payer from this to a degree.
I dont agree on the RB, actually IMHO it is holding it together.
The thing is it was the wrong moment, a too late one. As anything in life you should have an exit strategy in place, with trigger criteria and ready to go and action it. I find it incredible that this isnt common practice especially after the Finance Industry fiasco.
Northern Rock - indeed and I was one, I lost over 90% of my money that was with them, something like 90% losses plus then the b****s took out management charges.
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