Rates set to rise after banks’ downgrade
ANZ, ASB, BNZ and Westpac New Zealand Limited have all had their long term ratings downgraded to A1 from Aa3.
At the same time, the agency has revised the rating outlooks of these banks to stable from negative.
The move follows the downgrading of the four banks respective Australian parent banks - ANZ, Commonwealth Bank (CBA), National Australia Bank (NAB) and Westpac – in response to concerns about their exposure to Australia’s housing market.
Moody’s said the affirmation of the four New Zealand banks' baseline credit assessments reflects their strong stand-alone financial profiles.
The banks' asset quality is currently very strong while capital remains robust, the agency said.
“These favourable characteristics provide them with a strong buffer to withstand rising risks in the housing market as household leverage and house prices continue to rise, increasing sensitivity to employment shocks, or an eventual rise in interest rates.”
However, the New Zealand banks’ ratings could change if there was a change in the baseline credit assessments of their Australian parents or a material weakening in their financial fundamentals, Moody’s warned.
Massey University banking expert David Tripe said that the Moody’s downgrade could have a small, negative impact on the costs of wholesale funding.
“The downgrades could add about 10 basis points on to interest rates, but the banks are likely to be willing to negotiate on fixed rates.”
But he said the level of risk for the New Zealand banks was not at the level of that of the Australian banks.
“Macro-prudential policies have been applied more coherently here than in Australia and there has been a lot more high risk lending, which hasn’t really stopped, in New Zealand.
“That means it would take much more of a housing price crunch to have an impact on the market, and the banks, here than it would in Australia.”
Infometrics economist Mieke Welvaert agreed it was likely that the Moody’s downgrade would translate into interest rate rises in New Zealand, especially for those banks downgraded.
“The downgrade implies that those banks are more risky than they were and this plays into the risk equation, along with the ability for the banks to get offshore funding.
“Ultimately, that gets passed on to the consumer in terms of higher interest rates.”
However, any rise in interest rates is likely to delay a reheating of the housing market.
Welvaert said they had expected that house sales, aided by strong population growth, would have recovered a bit by this time of the year – and yet they keep going down.
“It is hard to fathom that more and more people will just keep squeezing into the same number of houses and so we do project that house sales will pick up again.
“But the Moodys downgrade means that any re-emergence of pressure in the housing market might be a bit delayed because it will have an impact on mortgage rates and that impacts on the market.”
Ongoing population growth does give some degree of security over how far the market can go down and, in turn, this alleviates some of the risk for the banks, she added.
Earlier this year, Standard & Poors assessed New Zealand’s banking system as low risk and forecast banks performance to remain strong.
But, while it reaffirmed the big four banks’ ratings, it downgraded those of smaller banks because of house price risks.
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