Banks relatively stable, impaired assets rise: RBNZ

Wednesday 13th May 2009

New Zealand’s banking system is still relatively stable, though the quality of the sector’s assets is deteriorating, the Reserve Bank said in its latest Financial Stability Report.

New Zealand was lucky its banking system hadn’t “experienced the distress seen in some countries” and while overall asset quality of banks remained strong, impaired assets had risen sharply since late last year, it said.

Across the banking system as a whole, impaired and past-due assets were around 1% of total lending in December, and lenders indicated there’s been a further increase in impairments since the start of this year, the report said.

“Banks must ensure that they make adequate provisions and maintain capital levels sufficient to absorb further unexpected losses,” said Deputy Governor Grant Spencer, said in a statement released in Wellington. “While current conditions warrant caution, it is important that the banks continue to lend to creditworthy borrowers.”

The global financial sector fell into disarray last year when several large US lenders collapsed, including Lehman Brothers Holdings and Bear Stearns, resulting in a massive bail-out by American taxpayers. As a result, Congress voted in favour of a US$700 billion fund to help build capital in the banks.

Since then, the US government investigated the country’s 19 largest banks’ ability to cope with the worldwide economic slump in its so-called stress tests. It decided 10 banks would require around US$75 billion in extra capital.

Australian banks and their New Zealand subsidiaries have remained resilient, with their systems not “materially exposed” to the offshore credit products considered responsible for the financial crisis,” the RBNZ report said.

New Zealand’s banking sector is dominated by Australia’s largest banks – Australia & New Zealand Banking Group, National Australia Bank, Commonwealth Bank and Westpac Banking Corp.

“Major government interventions have eased stresses in the international credit markets, but the adverse second-round effects of the financial crisis on global economic activity and commodity prices will take some time to play out,” and assessing and countering risks to the nation’s financial stability would continue to be a priority for the bank, Spencer said.

Agricultural debt was expected to rise as commodity prices declined, the report said. The revision in the Fonterra payout to $5.20 per kilogram was approximately the long-term average, and constitutes a significant reduction in budgeted farm revenue, according to the statement.

The average price of milk solids fell 4.1% to US$2,144 in the dairy giant’s online auction today.

While the country’s banking system continued to lend to households and businesses over the past year, growth had slowed, and some businesses had difficulty securing credit, the report said. Business lending was singled out as registering the fastest increase in impairments by the central bank.

Impaired and past-due corporate assets rose to almost 1.2% in December from 0.5% a year earlier.

New Zealand banks’ dependence on offshore borrowing meant they were still vulnerable to external financial shocks, but the central bank’s new prudential liquidity policy, to be released around the end of the month, would help reduce this. The policy seeks to ensure banks retain robust liquidity positions over both the short- and long-term, and manage risk around liquidity in a clear and transparent manner.

The central bank will complete its consultation with the banks and set out their obligations under the policy in the third quarter of this year.

Total bank assets in New Zealand were at $359.8 billion according to the KPMG Financial Institutions Performance Survey Review of 2008.

The Reserve Bank said the non-bank lending sector continued to contract in spite of liquidity pressures easing under the government’s Deposit Guarantee Scheme. The central bank is currently implementing a new prudential regime for the sector.

Businesswire.co.nz

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