New Zealand banks won't be rushing to lend after negative outlook from Fitch

Wednesday, 4 December 2019

Australian banks are still grappling with the fallout from the Royal Commission of Inquiry into their sector.

Research house Fitch has downgraded its rating outlook for New Zealand banks to negative.

It publishes ratings that reflect a business's ability to meet its financial commitments. The big four New Zealand banks are all rated AA-.

An outlook indicates the direction in which Fitch expects ratings to move in future.

New Zealand banks' rating outlook has been reclassified as negative while the sector is stable.

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But in Australia, where the parent companies of New Zealand's big four banks are based, the banks' ratings have been classified negative, and the sector outlook is negative, too.

The Reserve Bank's proposals were conservative by international standards, Fitch said.

It reflects outlook changes that have been made to the individual banks over the year.

Banking expert Claire Matthews, of Massey University, said it was a 'big deal' for the New Zealand sector.

'Particularly as Fitch advises Australia is the only developed or emerging market to have two negative outlooks. Ratings affect borrowing costs on the wholesale markets, and even the negative outlook could have some impact. However, it will be a bigger deal if the other rating agencies follow suit. '

The agency said there were a number of headwinds weighing on performance in Australia, including easing interest rates, subdued credit growth, and intense competition.

But a big one was the compliance cost associated with inquiries into conduct in the sector, which puts pressure on earnings and reflected poorly on banks' management of non-financial risk. Tim Roche, head of Australia and New Zealand, said the process of remediation would be complex and require culture change across the organisations. 'There is a risk of a misstep along the way that could negatively impact on their earnings.'

In New Zealand, Fitch said, strong asset quality would continue through 2020.

But banks' margins were under pressure and credit growth was likely to be slow.

'However, any significant deterioration is unlikely, given the strong focus on cost management to offset lower income and the generally stable asset quality.

'Our outlook reflects our negative outlook on the four foreign-owned major banks, which is in turn driven by the outlook on their respective parents. The standalone credit profiles of the major banks should remain stable, underpinned by their strong franchise in the local market – combined, they account for around 85 per cent of system loans.'

Fitch said New Zealand banks' capital positions could improve significantly through new rules from the Reserve Bank, set to be revealed on Thursday. The central bank wants banks to hold more capital against the loans they issue.

An increased capital buffer could be achieved through retained earnings, balance sheet management and capital from parent banks, Roche said.

'Regulatory developments in both New Zealand and Australia may lead the Australian parents of the large New Zealand banks to reassess aspects of their operations. However, Fitch believes the New Zealand subsidiaries remain core to the Australian parents due to returns which are still solid and the strong competitive positions of the banks.'

He said the banks were delivering good returns for their Australian parents and what had been proposed was conservative by global standards.

Roche said the biggest threats to New Zealand banks were external, such as trade tensions between the United States and China.