S&P says New Zealand’s economic vulnerabilities, including a material dependence on external borrowings, persistent current account deficits, and recent strong growth in house prices, could escalate.
“In our view, this increases the risk of a deterioration in New Zealand financial institutions’ credit qualities.”
It says it may lower the institutions on negative outlook by one-to-two-notches within the next two years if economic vulnerabilities worsen.
“We consider that this risk is heightened by New Zealand’s material dependence on external borrowings and persistent current account deficits, in the backdrop of an uncertain short-to-medium term outlook for the global economic recovery.
“Furthermore, we note recent strong growth in house prices (particularly in Auckland). Consequently, we consider that 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.
“For example, should there be a further widening in current account deficit, or a weakening in terms of trade, this could heighten the risk of a sharp depreciation in currency, which may affect confidence in the housing market, particularly if accompanied by a significant rise in unemployment.
“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.”
S&P says that the Reserve Bank’s planned initiatives to manage banking systemic risks could mitigate some of these vulnerabilities.
“We could revise the outlooks back to stable if we consider that the uncertainties around the structural imbalances have abated.”
The institutions affected are:
- The Co-operative Bank
- Heartland Bank
- TSB
- Credit Union Baywide
- Credit Union South
- First Credit Union
- New Zealand Association of Credit Unions
- Police and Families Credit Union.
- S&P’s negative outlook does not reflect deterioration in our assessment of bank-specific credit factors.
Its outlooks on seven other banks remain unchanged. These include; ANZ, ASB, BNZ, Westpac, Bank of India, Rabobank and Kiwibank.
S&P’s views here remain unchanged reflecting support from their respective parents.
