Moody's says outlook for Australian and NZ banks negative; warns on NZ dairy debts

Ratings agency Moody's has warned in a report on the Asian region's banks that its outlook for Australian and New Zealand banks was negative because Australian banks were exposed to large corporate debts and New Zealand banks were exposed to high debts in the dairy industry, particularly from large recently converted dairy farms. Moody's said Australian and New Zealand banks were relatively unscathed by the Global Financial Crisis and remained robust and strong despite the corporate and dairy risks. Here are the full comments from the press release below:

Moody's Investors Service says that its industry outlook for banking systems in Australia and New Zealand is negative, reflecting the impact of the slowdowns in global and domestic  economies, but both systems also remain robust. "The slowdowns are clearly making themselves felt on the performances of banks in Australia and New Zealand, but the systems in both countries remain very sound," says Jerry Chien, MD for Moody's Financial Institutions Group in Asia Pacific. By contrast, ratings outlooks vary, between stable and negative. Chien was speaking on the release of Moody's latest annual Asian Banking System Outlook, which covers 16 jurisdictions. The report is authored by senior analysts with the Moody's Financial Institutions team. The Australian financial system remains one of the world's most robust, having largely escaped crisis-related losses, but credit costs are mounting and loan volumes are contracting as economic weakness persists, the report says. While funding costs have risen as a result of the crisis and competition for deposits is high, pre-provision bank margins are improving as the banks are better able to price for risk. In the case of Australia, losses from the banks' retail exposures, which typically comprise over half of total loans, are not likely to create the same degree of stress as in other developed markets; rather it is business / corporate sector performance that will likely remain the swing factor for Australian bank asset quality. While Australian banks' corporate exposures are skewed towards stronger companies -- many of whom have recently raised capital -- single-name concentration risk is relatively high, creating some sensitivity to event risk. In New Zealand, the banking system, as indicated, remains sound, despite the challenges it faces. Customer deposits have grown faster than loans so far in 2009, in stark contrast to previous years. And regulatory developments continue to support financial system stability, but the country has a weakening local economy that is relatively small and narrow and makes it vulnerable to external shocks. The property market has suffered a decline over the past year, with house prices falling 9% in 2008, and as mortgage insurance is not common in New Zealand, this leaves the banks exposed to property market reversals. That said, the loan-to-value ratios of the rated banks indicate there is some buffer for a fall in property prices before any loan loss materializes. On the other hand, New Zealand corporate asset quality remains strong as companies have de-geared in recent years. However, material stress is appearing in the country's large dairy sector as a result of lower milk prices and high leverage present in some recent farm conversions and corporatisations.