Fitch raises outlook for NZ banks to stable, still negative on rest of Asia-Pacific

Wednesday 5th December 2018

Global ratings agency Fitch Ratings has raised the outlook for New Zealand banks to stable from negative, citing stabilising household debt and slowing house price growth.

That’s at the same time as Fitch downgrades or leaves as negative the outlooks for other countries’ banking sectors in the Asia-Pacific, including Australia, China and Singapore.

Fitch said it expects most metrics to trend flat over 2019.

“Firm cost control and repricing allowed net interest margins to remain broadly stable in 2018 which is likely to continue,” it said.

The changed outlook “reflects Fitch’s view that the banking system will remain concentrated in the four foreign-owned major banks (outlooks mostly stable) where there is still an extremely high propensity and ability for support if needed.”

The big four Australian-owned banks account for more than 86 percent of bank lending in New Zealand.

“Capital buffers above regulatory minimums should remain sufficient to withstand challenges in the operating environment.

Last month, Reserve Bank governor Adrian Orr reiterated that an outcome of the current review of bank capital requirements will be to require them to hold more capital – the central bank plans to release its final consultation paper on the matter later this month.

“We see further deceleration in banking system credit growth and slowing house-price growth in 2019 despite the possibility of a slight easing in macro-prudential measures by the regulator,” Fitch said.

Its report was clearly written before Nov. 28 when the Reserve Bank announced the easing of loan-to-valuation restrictions from January when it will allow banks to increase their lending to borrowers with less than a 20 percent deposit to up to 20 percent of total new mortgage lending, up from 15 percent currently.

As well, the deposits investors must have has been eased to 30 percent of a property’s value, down from 35 percent previously.

Although banks are allowed to lend up to 5 percent of total new lending to investors with smaller deposits, that level is so low as to effectively bar such lending.

“New Zealand banks appear to have been able to re-price accordingly thus far to maintain profitability but their ability to continue this in a low-growth, low-interest rate environment is decreasing,” Fitch said.

It notes that New Zealand households remain highly indebted relative to global peers and wage growth remains relatively low despite a strong labour market, “leaving households susceptible to shocks in either unemployment or interest rates.”

The joint review by the Reserve Bank and the Financial Markets Authority, which was in response to the banking scandals emerging from Australia’s royal commission into financial services, “is not a focal issue as in Australia,” Fitch said.

While the New Zealand review flagged improvements are needed in banks’ approach to identifying and managing conduct risk, it didn’t find widespread misconduct or poor culture issues, it said.

Fitch is expecting the returns of the Australian banks to fall further in the near term due to slowing mortgage credit growth and further remediation and compliance costs associated with the royal commission and other inquiries.

(BusinessDesk)

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