NBNZ sale may reduce competitive pressures: Moodys

Sunday 21st December 2003

Moody's Investors Service says that the outlook for the deposit and debt ratings of New Zealand's banks is stable and any changes would be driven by any movements in the ratings of their Australian parents.

"New Zealand's largest banks are all owned by major Australian financial institutions and their debt and deposit ratings have been harmonized with those of their parents. This reflects the core position of the New Zealand market within the franchises of the Australian majors, and the strong level of support that we believe would be forthcoming for their New Zealand subsidiaries in the unlikely event that it were to be required," Moody's says in a new report.

New Zealand bank's foreign-currency bank deposit ratings average Aa3 with a stable outlook, while bank financial strength ratings average C+ with a stable outlook. The country ceiling for foreign currency bank deposits is Aaa with a stable outlook. Moody's rates four of the country's banks.

The Moody's report says that the bank financial strength ratings are well positioned after several years of strong economic conditions with a benign medium-term outlook.

"Recent in-market consolidation is seen as supporting credit quality in the medium term. New Zealand BFSRs are lower than those of their respective parents, reflecting the banks' relatively smaller size and lower diversification," Moody's vice president and senior credit officer Patrick Winsbury says.

The report says that the Australia and New Zealand Banking Group's decision to acquire the National Bank of New Zealand from Lloyd's TSB Group will reduce the number of major players in New Zealand to four from five.

"We believe this reduction in capacity may prove relatively significant, given the small size of New Zealand's banking market. This consolidation has the potential to reduce competitive pressures in the medium-term, although in the short-term these could intensify as competitive positions are realigned," Winsbury says.

The report notes the entry of two new institutions -- Kiwibank and Australia's St.George -- is not likely to introduce significant competitive pressures on the major banks any time soon, given their small sizes.

At the same time, New Zealand's regulators are undertaking a number of initiatives in the area of crisis management, the report notes. From a ratings perspective, the most significant is a suggestion that depositors be asked to assist in recapitalising a failed bank.

"If introduced into regulation, this could have negative ratings
implications for the deposit ratings of weaker banks," the report says -- in particular for those that do not enjoy strong parental support.

Furthermore, the report says that New Zealand's banking regulators have traditionally adopted a conservative stance on capital adequacy with a marked reluctance to accept hybrid equity securities and this is unlikely to change as the market prepares for the application of Basel II.

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