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Moody's sees stable outlook for NZ banks

Tuesday 21st September 2010

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The outlook for New Zealand’s banking system is stable, reflecting the steady recovery from a mild recessions and improved GDP growth, according to a report by Moody’s Investors Service.

The report, which represents the agency’s view on the likely direction on fundamental credit conditions in the sector in the short to medium-term, said the outlook was further supported by the fact that the four major banks have solidified their market positions and improved their risk-adjusted profitability, which has assisted capital generation.

“We expect fundamental credit conditions for the New Zealand banking sector to stabilize as economic indicators improve, which, in turn, will usher in the return of consumer and business confidence,” said Marina Ip, Moody’s assistant vice president and author of the report.

The average rating for ANZ National Bank, ASB Bank, Bank of New Zealand and Westpac New Zealand was C+.

The report examined macro-economic prospects, loan portfolios, market share, regulation, the effects of the new Basel proposals, and the relationships between the local banks and their Australian parents.

Moody’s noted that non-performing loans continue to improve after stabilising at the beginning of the year, particularly in the business and corporate segment.

“A recovery in dairy prices this year should ease farm cash flow pressures, leading to a greater portion of performing rural loans,” Ip said.

“With improved economic forecasts, asset impairment levels should also improve; however, we will watch for signs of new exposures becoming delinquent.”

Rural lending has become a problem sector for banks in recent years because farm conversions and overleveraging during the boom years.

Moody’s cautioned that borrower concentrations still in the property sector, where development and completion of projects had slowed in response to falling market values.

The agency said banks also remain vulnerable to funding disruptions, as wholesale funding accounted for an estimated 40% of total.

“While the government guarantee for wholesale funding closed for new issuances after April 30, the banks had been able to access the non-government guaranteed markets during the financial crisis, albeit at reduced volumes as lending growth was intentionally slowed," Ip said.

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