Standard & Poors announced they have left their ratings of New Zealand banks unchanged – despite concerns about the country’s rampant housing market.
But strong house price inflation, coupled with an increase in private sector credit growth, has made for increased economic risks for the banks in the view of the ratings agency.
Standard & Poors analyst Nico DeLange said they believe the risk of a sharp correction in property prices has further increased.
“If it were to occur - with about 56% of registered banks' lending assets secured by residential home loans - the impact on banks would be amplified by the economy's external weaknesses, particularly its persistent current account deficits and high level of external debt).”
The increase in the economic risks facing the banks is contrary to the agency’s previous base-case expectation that the rise in New Zealand’s house prices would slow in 2016, he said.
The agency factored the macro-prudential tools initiated by the Reserve Bank, including the proposal to expand their scope, into their assessment of the banks.
DeLange said they consider these tools to have been only partly successful in limiting the pace of build-up of the risks facing the banks.
“In our opinion, structural constraints such as supply and demand imbalances and continued high migration levels will pose significant challenges to the effectiveness of macro prudential tools.”
For this reason, Standard & Poors will now apply higher risk weights for their loans in their capital analysis of the banks.
The agency said while there has been some weakening in the capital levels of all the banks, the stand-alone credit profiles (SACPs) of most of them will remain unchanged.
Exceptions were ASB Bank Ltd. and Rabobank New Zealand Ltd whose SACPs have weakened by one notch each.
ASB’s SACP has been revised to 'bbb+' from 'a-', which is on par with the SACP of New Zealand’s three other major banks, while Rabobank's SACP has been revised to 'bbb-' from 'bbb'.
However, DeLange said their ratings on ASB and Rabobank remain unchanged reflecting their assessment of timely financial support from their respective parents, if needed.
“The revisions of the SACPs of ASB Bank and Rabobank NZ stem from our view of increased risks across the banking system in New Zealand.
“We consider that no new significant bank-specific risks, such as any asset quality concerns, have emerged that drive these revisions.”
