NZ banks on stable footing in 2015 supported by economic growth, Fitch says

Wednesday 14th January 2015

New Zealand's banks are expected to maintain their profit margins as the country's upbeat economic momentum continues to support their business in the coming year, according to rating agency Fitch Ratings.

The rating agency has retained the stable rating and sector outlooks for New Zealand's banks in 2015, supported by its forecast for gross domestic product to expand 2.9 percent in the year, it said in a report. Strong building activity in Canterbury and Auckland, and record migration flows are backing the nation's growth, which Fitch sees as providing an opportunity for solid earnings growth in New Zealand's banking sector.

"New Zealand banks are among the more profitable in the developed world. Fitch expects them to maintain strong net interest margins," it said. "Any reduction in asset margins due to fierce mortgage competition is likely to be offset by further funding cost reductions."

In the Reserve Bank's November financial stability report, the central bank said New Zealand's lenders are well-placed to withstand a sharp downturn with sufficient underlying earnings allowing them to conserve their capital levels and meet regulatory requirements.

The Fitch report cited falling dairy prices as a risk to lenders, which could put pressure on their business lending, which has been propped up of late by strong global demand for the nation's milk products. That's since waned, and while farmers have stronger balance sheets than they did before the 2008 global financial crisis, an extended period of low global milk prices would put some farms under pressure and lead to losses among some lenders.

The lower dairy prices are also likely to reduce the asset quality in banks' business portfolios, though residential lending is expected to remain sound after the Reserve Bank imposed restrictions on low-equity home lending in 2013 to slow down the riskier lending.

Fitch anticipates the increased economic activity and household consumption will continue to boost lending, and anticipates "mid-single digit loan growth" in 2015.

Reserve Bank figures show lending grew 4.5 percent in the year ended Sept. 30, 2014, about the same pace of growth the year earlier, and led by an 8.3 percent increase in consumer credit growth.

The rating agency said New Zealand's banks are expected to maintain their improved funding profiles, using long-term wholesale markets, while local deposits are likely to keep growing with households and businesses more cautious than before the global financial crisis.

BusinessDesk.co.nz

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