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).
19 Comments
The standard is poor
IMF could 'potentially' send ratings agencies broke (IMF the litigation funder re CDO's etc)http://www.abc.net.au/insidebusiness/content/2011/s3746766.htm
Economic pulse: Who rates the ratings agencies?
http://leadingcompany.smartcompany.com.au/execution/economic-pulse-who-…
Seems the ratings agencies may have net tangible assets negative .
ALAN KOHLER: So what do you think the total potential redress is against the credit rating agencies?
JOHN WALKER: Oh, well, in the billions. Relative to the main ratings agencies capitalisation, which is in excess of $10 billion each, each of the ratings agencies have negative net tangible assets, so very relevant to - compared to the creditworthiness of the rating agencies themselves.
ALAN KOHLER: Well does that mean that there's a limitation on how much you can get out of them?
JOHN WALKER: Potentially. The - you can't get blood out of a stone. Rating agencies determine credit risks of targets. We've looked at the credit risk associated with the rating agencies and we're reasonably comfortable for payments in excess of a billion dollars, but where money is needed to be paid greater that than sort of sum, then the rating agencies may not get the support of the capital markets and potentially they are a credit risk.
ALAN KOHLER: Aren't they insured?
JOHN WALKER: There's no doubt there will be some insurance, but not in the billions of dollars.
ALAN KOHLER: So you could send Standard & Poor's and Moody's and Fitch Ratings all broke?
JOHN WALKER: Well we didn't cause the problem.
ALAN KOHLER: Is that a yes?
JOHN WALKER: Potentially.
start by back tracking thru Stephen Hulme's work to see natrure of risks.
For an example:
http://www.commbank.com.au/about-us/shareholders/financial-information/…
and
http://www.commbank.com.au/content/dam/commbank/about-us/shareholders/p…
page 123, 124 talk of regulation.
Most seasoned lenders do not make advances based on guarantee first.
For example a name lend is because of who you are we will lend to you.
If you do not have enough collateral more from any other source needs be pledged.
Gtee paradox:
Best gtee are from those that do not give it (the one you do not have).
The gtee you obtain is from someone that gives it freely so not worth much the one you have).
Focus on the collateral... please.
Focus on the collateral... please.
This very recent Fed study of cash collateral in Securities Lending etc transactions is well worth a read.
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.
This is a bold unfounded claim.
As noted here, foreign owned Aussie banks have very little skin in the game and not much to lose by withdrawing when faced with the prospect of a systemic banking crisis.
Equally, Kiwibank is owned by that failing SOE entity known as NZ Post.
The government, under SOE legislation, is prohibited from extending a guarantee to this entity. I had occasion to investigate and report this matter to the RBNZ after Kiwibank telephonists made repeated claims that the institution's deposits were protected by such a backstop.
We (NZ regulators) should be like those in the USA, and wanting such; if an Australian bank collapses (think bank west), they should not/do not want to have to ask its home country for money.
We think that as Oz banks are sooo big here, they need be marked harder than minnows..
We note S&P are not bank regulators..
How can people sleep at night. A crash is coming. It has already arrived in Europe. Think of a stock market that dived 90% (Ireland) or a country that got a new capital.( Icelands capital changed to $1.50) Really the only issue is the timing and no one is going to ring the bell. However the way we are leveraged to China and the way those in the know are setting up their bolt holes with dirty money in little ol NZ suggests its not too far away,
Whether its 5 months or 5 years and is caused by social unrest in China as the peasants realise that they are being shafted once again or a major outbreak of a flu virus or something like foot and mouth here in NZ the rule is that at some stage we will return to the long term average. A responsible govt, family, business etc has to know that the madness cannot continue and it is better to play a less risky game than to bet it all.
Smalltown - Ireland and Iceland are a totally different kettle of fish to NZ. Much higher Government debt, far bigger property bubble and in Iceland's case... a false financial boom. You might say the same of Auckland's property market right now but the rest of the country is not Auckland. The news reports here act as if the whole country shares what happens in the big smoke but we don't.
This from Fran O'Sullivan when JK was Finance Minister (in waiting) to Don Brash's challenge in the general election;
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10336608
A facinating read looking back!
In particular note;
Key will soon get a chance to test his ideas as the election gets past the phony stage. National will release its tax cuts package early on in the campaign. Debate will inevitably focus on the size and affordability of the package. But the initial tax cuts will not be radical.
Key has no plans to increase GST to 15 per cent (although he can quickly parrot off the numbers) to offset major personal tax cuts as Labour did in the 1980s. That would also involve adjusting benefit rates to offset the increased cost of consumption.
Also interesting the comment on Ireland's broadband rollout - and of course we taxpayers got lumbered with that one. Also quite hilarious that he is critical of NZ's focus on it's traditional sectors (i.e. agriculture) .. and of course what's he ended up spending our money on? Irrigation.
Seriously, read this and you can see - he didn't have a clue - still doesn't. Knows nothing but wheeling and dealing and making money through favourable tax regimes at the expense of the local population (e.g. Ireland, Iceland, Cyprus etc). We are lucky he didn't have the reins in those years prior to the GFC - we'd be a basket case now.
Here's what Heartland says about S&P's announcement:
Heartland New Zealand Limited’s ( NZX: HNZ ) subsidiary, Heartland Bank Limited (“ Heartland ”), advise s that Standard & Poor’s (“S&P”) has revised its assessment of the e conomic risks in New Zealand .
As a result of this assessment, Heartland (along with all other New Zealand banks) has had it s credit rating outlook reviewed (as ratings are pegged to th e anchor rating for New Zealand banks ). S&P hav e affirmed Heartland’s investment grade issuer credit rating of ‘BBB - ’ and revised the outlook to negative from stable .
S&P stated “The negative outlook does not reflect deterioration in our assessment of bank - specific credit factors.”
In the S&P Research Update , the Agency stated that it views Heartland as “...exhibiting early signs of an improve ment in the key target markets that the bank operates in.”
S&P also said that any further consideration of Heartland’s rating stemming from a downward adjustment i n the anchor rating “ would need to take into account the extent to which the bank's improving business position is offsetting rising economic risk pressures. ”
Heartland’s business model includes greater diversity and less exposure to residential property, and is based on a strategy of competing in stable and less contestable niche markets .
I don't know why SBS have no rating. Are they beyond concern or beyond hope? I do have accounts there.
Have investors ever considered the alternative of investing with their feet and putting their money in juristitions with a Govt or finance industry guarantee? Yes those concerns may be able to print money to devalue the asset, or close the banks like Argentina for the same effect. An alternative is metal or notes under the bed. Unfortunately the latter are inflammabile and non inflatable.
Perhaps the alternative is a solar power system on the roof!
SBS do have a credit rating from a recognised ratings company. They are rated BBB by Fitch. That is investment grade.
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