Entities with major Canterbury exposure at most risk of downgrade after Christchurch earthquake, S&P says

By Gareth Vaughan

Financial institutions with significant exposure to Canterbury are the entities at the most risk of downgrade after this week's tragic earthquake, credit rating agency Standard & Poor's (S&P) says.

Peter Sikora, S&P's analytical manager for financial institutions in the Pacific, told interest.co.nz it was still early days in terms of assessing the economic impact of the quake with S&P very much in information collecting mode.

"Our overall view at this point would be that certainly the financial impact, or the credit or rating impact, for the major banks is likely to be less than for other banks because they’re members of larger groups," said Sikora.

"Within New Zealand those with exposures to the Canterbury region intuitively are more vulnerable to being financially impacted," he added. "(But) there’s a lot of detail required in terms of understanding what assets have been impacted, what mitigants can be expected with insurance, the Earthquake Commission, and other fiscal and shareholder support that’s made available."

"We’ll be monitoring the situation (and) to the extent that we feel we have sufficient information or cause to adjust or respond on ratings we’ll do so."

Although Sikora didn't mention any companies by name an obvious entity with major Canterbury exposure is Building Society Holdings, created just last month through the merger of Pyne Gould Corporation's Marac Finance, CBS Canterbury and the Southern Cross Building Society. PGC today delayed the release of its interim financial results as it continues to deal with the collapse of PGC House in central Christchurch in Tuesday's earthquake and the potential loss of up to 14 staff.

Building Society Holdings, which plans to apply to the Reserve Bank for a banking licence in July, received a prized BBB- credit rating from S&P in January. The rating, S&P's lowest investment grade rating, is considered a key plank in any banking licence application.

'Payments system ok'

Meanwhile, Sikora said S&P wasn't just focused on what might the ultimate dollar loss from the earthquake might be.

"We’re focused on full and timely payment so one of the first things we did was have a quick look at the extent to which this terrible disaster had an impact on the payments system," Sikora said.

"We’re comfortable after investigations and comments from the Government and regulators that it seems to be intact and not a problem in this instance."

"(But) we’re heading into a very uncertain environment where there’s likely to be, if we look at history, some delays in loan payments, with the banks being sympathetic (and) giving people the ability to delay making payments," Sikora added.

"While that might not be fully and directly impacting ultimate loss, it impacts cash flows so we need to monitor the extent to which those things are being impacted as well."

Prior to the earthquake Moody's Investors Service, meanwhile, had already placed its ratings on the big four banks - ANZ, ASB, BNZ and Westpac - on review for possible downgrade.

"Given that the major banks' ratings are already on review, the impact of the earthquake alone will not lead to further rating actions at this stage", said Marina Ip, assistant vice president at Moody's in Sydney.

Moody's initial estimates suggested the big banks have a fair degree of flexibility to accommodate earthquake damage-related losses.

"First, their exposure to Christchurch averages only around 10% of their New Zealand loan portfolios. Second, the major banks have the flexibility to increase provisioning if required, by lowering the dividends paid to their Australian parent banks, which will allow them to retain more profits to reinforce their capital bases", Ip added.

She noted that the Christchurch earthquake on September 4 last year resulted in minimal impact to the major banks' loan portfolios.

"But the devastation caused by Tuesday's earthquake is far greater, and the scale of business disruption likely to be far more pronounced," said Ip.

"From a rating perspective, we remain particularly watchful with regard to the secondary effects of the earthquake on economic activity and the flow-on impact to major bank earnings and asset quality. This will now become part of the issues we are considering in the pre-existing rating review".

S&P has now also released a statement, see it below:

Standard & Poor’s Ratings Services said today that the Feb. 22, 2011, Christchurch earthquake could result in downward rating pressure on some smaller New Zealand financial institutions, particularly those operating in the Canterbury region. While our initial expectation is that most ratings on financial institutions will remain unchanged and New Zealand's financial system will remain stable, there is a possibility that some ratings could be subject to downward pressure.

Christchurch, New Zealand's second-largest city with a population of about 370,000, experienced a large earthquake on Feb. 22, 2011, which resulted in loss of life and significant property damage. Our initial expectation is that the New Zealand major bank sector remains well placed at current rating levels.

Our current belief is that the major banks are unlikely to see downward rating pressure stemming from the Christchurch earthquake. The long-term counterparty ratings of the four major New Zealand banks, namely: ANZ National Bank Ltd.; ASB Bank Ltd.; Bank of New Zealand; and Westpac New Zealand Ltd., are 'AA'. Our current rating view concerning the New Zealand major banks is likely to persist as long as we continue to assess that the New Zealand major banks remain core businesses to their 'AA' rated Australian parent institutions.

For smaller New Zealand financial institutions, be they banks or non-banks, downward rating pressure could emerge, particularly on those institutions that have a greater geographical presence in Christchurch and the surrounding Canterbury region. We note that business dislocation in Christchurch and surrounding areas is likely to be significant, and the extent to which this negatively impacts repayment capacity of business and personal borrowers is not yet clear.

The extent to which insurance coverage lessens borrower stress--a factor that may ameliorate our concerns--is not yet clear. The medium to long-term effects of the Christchurch earthquake on the broader New Zealand economy are also not yet clear (see separate media release tiled "Christchurch Earthquake Will Have No Immediate Impact On The New Zealand Sovereign Rating").

Should the impact be more negative than we expect, at current rating levels downward ratings pressure could emerge. From a payment system perspective, New Zealand regulators have said that no problems have been reported within the New Zealand payments and settlements systems, which currently gives us a degree of comfort at current rating levels.

The earthquake will place further downward pressure on the earnings of the general insurers in New Zealand, but the capital strength and extensive reinsurance protection of major general insurers would limit negative rating pressure at this stage (see separate media release titled "Christchurch Earthquake Will Worsen Insurance Earnings, But Capital And Reinsurance Remain Rating Strengths").

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