Moody's says Basel III means structural change & lower profits for NZ banks

New Basel proposals for global banking regulatory reform are likely to lead to structural changes to the New Zealand banking system and lower profits for banks, according to Moody’s Investors Service.

(Updates add further detail, additional links & paragraph on deposits).

In a report on the New Zealand banking system, the international credit rating agency says the challenges for New Zealand banks under the so-called Basel III proposals are related to a requirement for increased “stable funding” and liquid asset holdings. These proposals, Moody’s says, directly address the issue of New Zealand banks‘ heavy reliance on offshore wholesale funding.

Moody's says New Zealand's major banks remain vulnerable to funding disruptions, given wholesale funding accounts for around 40% of their total funding, with about two-thirds of this sourced overseas.

“The issue clearly affecting New Zealand banks under the proposed Basel liquidity ratios is the pool of available “liquid assets” under the Basel definition,” Moody’s said.

“New Zealand banks may not be able to meet the liquidity ratios because of an insufficient supply of eligible assets under the current definition.”

This is largely driven by a limited supply of New Zealand government debt and the country’s small domestic capital markets.

Stable funding is defined as types and amounts of equity and liability financing expected to be reliable sources of funds over a one-year time horizon under conditions of extended stress. Liquid assets include cash, central bank reserves, marketable securities, government or central bank debt, potentially "vanilla" corporate bonds and covered bonds not issued by the bank itself.

“While the proposed changes would negatively affect profits, our initial analysis -- from a ratings perspective -- suggests the possibility that (absent other profit pressures, such as an increase in competition), the margin loss would be offset by the improvement in bank funding/liquidity,” Moody’s added.

Based on figures in the bank’s June quarter general disclosure statements the big four – ASB, ANZ, BNZ and Westpac - recorded combined profit of NZ$632 million in the June quarter this year compared to an overall loss of NZ$410 million in the same period last year. That’s a swing of NZ$1.042 billion and largely relates to BNZ provisioning for its structured finance transaction tax payout to the Inland Revenue Department in the June quarter last year, which pushed it to a NZ$583 million loss for that quarter.

Overall Basel impact less significant than elsewhere

Overall Moody’s said the impact of the Basel Committee’s capital proposals should be far less significant than elsewhere in the world because local banks are already well capitalised.

“The Reserve Bank of New Zealand requires them to hold additional capital under capital adequacy calculations that are more conservative than those of Australia’s Australian Prudential Regulation Authority (APRA) and the UK’s Financial Services Authority (FSA).”

A Reserve Bank spokesperson told interest.co.nz in July that the central bank and bank regulator will consider all aspects of the global regulatory discussions and will look to change standards where doing so is appropriate for the New Zealand financial system.

The Basel reforms are being undertaken by global banking regulators in the wake of the Global Financial Crisis. They will be presented to the G20 Leaders summit in Seoul in November.

Meanwhile, Moody's said customer deposits fell 1% in the year to June compared to a rise of 1% in housing loans and a decline of 2% in business loans.

The major banks are fighting hard for term deposit money because of the introduction of the Reserve Bank’s core funding ratio (CFR) on April 1. Under the CFR banks must source at least 65% of their funding from retail deposits and bonds with durations of at least one year. The central bank wants to increase the CFR to 75% by mid-2012 to offset New Zealand banks’ reliance on international wholesale, or 'hot' money, markets.

Moody's said, however, it didn't expect a significant increase in customer deposit growth rates because wealth in New Zealand is generally held through property ownership, rather than deposits.