Threats linger for banks – S&P

In a new report on the prospects for New Zealand banks in 2016, the ratings agency warns that house prices rises and a lengthy slump in dairy prices still pose ongoing risks to the banks.

Standard & Poor's credit analyst Nico de Lange said acceleration in house price growth would expose increased imbalances in the economy.

In turn, this would increase the vulnerability of the banking system to a sharp correction in property prices.

Exposure to dairy farming is another potential headwind for New Zealand's banks, De Lange said.

About 10% of New Zealand banks' lending is to the dairy sector, which accounts for two-thirds of agricultural loans.

“After a prolonged slump in dairy prices, many dairy farmers have incurred operating losses,” he said.

“Should lower dairy prices persist, we believe banks would suffer a modest increase in credit losses, which would moderately cut their profits."

However, the ratings agency has a stable outlook for New Zealand’s banking system.

Its base case assumes that inflation-adjusted growth in New Zealand's house prices will stabilize.

De Lange said they believe that, even though house price increases in Auckland remain elevated, some signs are emerging of a slowdown in the country's largest city.

“That said, house prices in regions close to Auckland and in other regions recently rose; we will continue to monitor these trends and consider the impact that they may have on our assessment.”

In the rating agency’s view, regulatory actions such as the LVR "speed limits" and curtailments on investor lending did counter the rise in house prices to some extent.

“We also believe that the curtailment of high loan-to-value lending will support the resilience of residential mortgage portfolios for the banking system in a downturn.

“That said, New Zealand household indebtedness remains elevated, evidenced by high private-sector debt levels.”

Overall, the ratings agency found the profitability of New Zealand’s banking system to remain strong relative to its international peers.

This was reflected in the banks' strong core earnings and net interest margins.

“We do not foresee that banks would be taking on undue risks, even though some margin pressures may be looming on the horizon,” it said.