Lower credit rating means more costs for smaller banks

Friday, 26 May 2017

Lower credit ratings mean it's cheaper for smaller banks to raise money from New Zealanders than seek wholesale funding.

Lower credit ratings put a squeeze on New Zealand's smaller banks trying to raise money on international markets.

ANZ, ASB, Westpac and BNZ all have AA- ratings from Standard & Poors and Fitch. That signifies they have very strong capacity to repay investments.

But their smaller competitors, who do not have the heft of big Australian banks backing them, have lower ratings. Heartland has a BBB rating from Fitch, Kiwibank an A from S&P and AA from Fitch and TSB an A- from Fitch.

That lower credit rating makes it more expensive for them to raise money to lend out to customers. Banks are competing fiercely for deposits at present, anyway.

A lower credit rating means the independent banks have to pay more for money from wholesale and institutional markets.

David Mackrell, chief financial officer of Heartland Bank, said he would expect his organisation to have a lower credit rating than the big four. The banks' rating was last reassessed in October.

He said it did not make a material difference in the retail deposit market, when the bank was seeking money from 'mum and dad' investors.

But he said the difference would encourage smaller banks to seek out different niches to compete in. 'We've got a very good call rate and nine-month rate. Other banks have a very good 12-month rate.'

He said the bank's bigger competitors' lower wholesale costs meant they were able to offer more competitive rates to their customers.

'We try to play where the big banks don't want to play – smaller personal lending or motor vehicle lending. That's our business model, to look for those places they don't want to be.'

But Kiwibank spokesman Bruce Thompson said the difference was a small percentage of his bank's funding.

Banking expert Claire Matthews, of Massey University, said once a bank dropped out of the A range of ratings, it would become more difficult to raise money, as well as more expensive. 'In order to remain competitive the smaller banks may have to absorb the higher cost of funds for those borrowings.'

The issue has made headlines in Australia after S&P recently downgraded the credit scores of more than 20 smaller Australian financial institutions as it warned of the risk of a property market downturn.

But it left the big four's ratings in place, assuming that the government would help them if necessary. Regional banks said that meant their funding costs would increase and make it harder to compete.

'The risk of a sharp correction in property prices has increased,' S&P said in a statement.

'We consider that if this downside scenario were to occur, all financial institutions operating in Australia are likely to incur significantly greater credit losses than at present.'