Moody's says NZ tax rulings won't affect big 4 banks' credit quality

Moody's said the recent tax rulings in New Zealand against BNZ and Westpac costing them a combined NZ$1.7 billion was unlikely to affect the credit quality of the big 4 Australian banks because they had raised a capital buffer of over NZ$20 billion from Australian savers. Here is the full statement below from Moody's.

Australia's four major banks may face sizeable costs as a result of unfavourable tax judgments in New Zealand. However, the net impact on the credit quality of the Australian banks will be fairly limited "“ and the ratings of the banks and their New Zealand subsidiaries will not be affected "“ in large part due to the substantial capital raisings and provisioning that the banks have undertaken during the global financial crisis. Last Thursday, New Zealand's High Court in Auckland found in favour of the Commissioner of Inland Revenue (CIR) in relation to four representative structured transactions the Westpac Banking Corporation (Westpac) conducted a decade ago on behalf of clients. This development follows a similar judgment in July 2009 regarding transactions structured by National Australia Bank (NAB), through its Bank of New Zealand subsidiary. However, the Westpac judgment may be the more significant, given that the bank had obtained a favourable ruling from the CIR on a similar transaction in 2001. NAB has indicated that it will appeal, while Westpac still has to reach a decision. Judgments are still pending on similar structured transactions conducted by the Australia and New Zealand Banking Corporation (ANZ) and the Commonwealth Bank of Australia (CBA). The potential costs of these judgments, while sizeable, are not sufficient to affect the four banks' ratings. Firstly, the banks have raised capital to levels where deducting the full potential cost of the judgments would still leave them in line with expectations for their rating level. This is particularly true if the Australian regulator's conservative Tier 1 ratio calculation methodology is considered. If, for example, the methodology of the UK's FSA were adopted, the ratios would be as much as 1.5 "“ 2.0 percentage points higher. Secondly, the banks raised relatively large general provisions early in the crisis "“ and their coverage of likely credit losses from the crisis is probably strengthening. The outlook for Australian economy has improved rapidly, leading the Reserve Bank of Australia to kick off the interest rate rise cycle with a 25 bps increase in the cash rate last week. Hence, the specific provisioning costs associated with the tax judgments could potentially be accommodated to some degree by a transfer from general provisions rather than purely from earnings. Finally, pre-provision earnings of the banks are holding up well, as market consolidation and the exit of price-led competitors have allowed for improved risk pricing, offsetting increased funding costs.