Fresh from Fitch this morning:
Fitch Ratings-Sydney/Singapore-08 April 2013: Fitch Ratings says that challenges are increasing for New Zealand’s major banks with strong asset growth and fierce price competition potentially leading to asset bubbles. This in turn may impact bank financial strength and place negative pressure on Viability Ratings (VR).
In a report published today, Fitch highlights that New Zealand’s high household debt and a low national savings rate could pose a risk to the financial system if asset prices decline or if the unemployment rate increases. Potential asset quality pressure could contribute to weaker future earnings, and ultimately impact capitalisation.
In addition, New Zealand’s property market has seen strong house price inflation and credit growth – particularly in higher loan/value (LVR) mortgages – in the past 12 months, while leverage remains high in some segments of the agriculture sector which could leave bank asset quality susceptible to weather-related events such as drought.
However, the banks’ current strong capitalisation and impairment reserves, and healthy operating profitability provide buffer for a moderate house price correction. Significant deterioration in these measures is only likely after a material housing or economic downturn.
To address some of these issues, the Reserve Bank of New Zealand (RBNZ) has recently announced consultation on measures to strengthen its macro-prudential regulation. Any additional regulation which limits the creation of asset bubbles, and ensures strong banking balance sheets will be viewed positively by Fitch. The consultation paper outlines measures which include limits on LVRs for mortgage lending and sector exposure, the counter-cyclical buffer to strengthen capital levels, and a temporary increase in the core funding ratio. The consultation process closes on 10 April 2013.
At end- December 2012, New Zealand’s banking system remained sound with the largest four banks (ANZ Bank New Zealand, ASB Bank Limited, Bank of New Zealand Limited, and Westpac New Zealand Limited; all rated AA-‘ with Stable Outlook. They are all owned by major Australian banks and together hold a market share of 85% of New Zealand’s mortgage assets.
Note that Fitch views the the deployment of macroprudential policies as rating favourable.