Standard & Poor's has warned it may cut the credit ratings for TSB Bank, The Co-operative Bank (formerly PSIS), Heartland Bank and five credit unions by as much as two notches over the next 2 years, saying New Zealand's high foreign debt and current account deficit had heightened the risks of a housing market correction that could increase the banks' credit losses.
A rating cut could be problematic for the banks, given no institution with a credit rating of BB or lower (seen as non-investment grade) is licensed as a bank in New Zealand. TSB is rated BBB+ so could handle a two notch downgrade and still have a BBB- rating, which is seen as the minimum investment grade rating. However, The Co-operative Bank and Heartland Bank are already at the lowest rung of the investment grade ladder with BBB minus ratings. The Reserve Bank has previously said when granting bank licenses that it preferred an institution to have an investment grade rating.
Asked if the banks' ratings were cut below investment grade whether that would place their bank status in jeopardy, a Reserve Bank spokesman told interest.co.nz; "A credit rating is only one of a number of criteria that we have regard to when considering bank registration. We do not comment on individual banks." See credit ratings explained here.
Standard & Poor's said it had revised the outlooks to negative for Credit Union Baywide (BB), Credit Union South (BB-), First Credit Union (BB), NZ Association of Credit Unions (BB+) and the Police and Families Credit Union (BB+). They are not registered as banks and are instead described as Non Bank Deposit Takers under the Reserve Bank's prudential supervisory regime.
"We may lower the ratings on the eight New Zealand banks that are on negative outlook by one-to-two-notches within the next two years if economic vulnerabilities worsen," S&P said.
New Zealand’s dependence on foreign borrowings and persistent current account deficits heightened the risks, given an uncertain short-to-medium term outlook for the global economy, it said.
"There is an increasing risk that a sharp correction in property prices could occur if there is a weakening in the country's macroeconomic factors."
New Zealand's current account deficit was forecast in the 2013 Budget to rise to 6.5% of GDP by 2017 from 4.4% in 2012.
A widening of that deficit could heighten the risk of a sharp fall in the New Zealand dollar, which may hit housing market confidence if accompanied by a rise in unemployment, the agency said.
"If these were to occur, banks' credit losses could rise materially, given that there was a build-up in housing prices and domestic credit over the period preceding the global financial crisis. We consider that such a scenario would have a high impact on the banking sector and financial strength of the balance sheets of New Zealand banks."
S&P said its ratings of CBA's ASB, NAB's BNZ, ANZ NZ, Westpac NZ, Bank of India (NZ), Rabobank NZ and Kiwibank were unchanged, reflecting the support of their parents.
"For the banks that benefit from group support, we are of the view that the ratings of these institutions would remain equalised with that of the parent," S&P said.
"However, if economic vulnerabilities worsen, the stand-alone credit factor assessments could be negatively impacted."Standard and Poor's has cut the outlooks for its ratings on eight smaller New Zealand banks to negative, saying the ratings were vulnerable to one or two notch downgrades within the next two years if there was a housing market correction.
The ratings agency also cited New Zealand high foreign debts and rising current account deficit in changing the outlooks and warned of the risk of a housing market downturn.
It said the eight banks were The Cooperative Bank, Heartland Bank, TSB Bank, Credit Union Baywide, Credit Union South, First Credit Union, NZ Association of Credit Unions and the Police and Families Credit Union.
"We may lower the ratings on the eight New Zealand banks that are on negative outlook by one-to-two-notches within the next two years if economic vulnerabilities worsen," S&P said.
New Zealand’s dependence on foreign borrowings and persistent current account deficits heightened the risks, given an uncertain short-to-medium term outlook for the global economy, it said.
"There is an increasing risk that a sharp correction in property prices could occur if there is a weakening in the country's macroeconomic factors."
New Zealand's current account deficit was forecast in the 2013 Budget to rise to 6.5% of GDP by 2017 from 4.4% in 2012.
A widening of that deficit could heighten the risk of a sharp fall in the New Zealand dollar, which may hit housing market confidence if accompanied by a rise in unemployment, the agency said.
"If these were to occur, banks' credit losses could rise materially, given that there was a build-up in housing prices and domestic credit over the period preceding the global financial crisis. We consider that such a scenario would have a high impact on the banking sector and financial strength of the balance sheets of New Zealand banks."
S&P said its ratings of CBA's ASB, NAB's BNZ, ANZ NZ, Westpac NZ, Bank of India (NZ), Rabobank NZ and Kiwibank were unchanged, reflecting the support of their parents.
"For the banks that benefit from group support, we are of the view that the ratings of these institutions would remain equalised with that of the parent," S&P said.
"However, if economic vulnerabilities worsen, the stand-alone credit factor assessments could be negatively impacted."
(Update adds comments from Reserve Bank spokesman, link to credit rating explanation).
We welcome your comments below. If you are not already registered, please register to comment
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.