Rising Auckland house prices weigh on NZ lenders, S&P says

Friday 14th August 2015

New Zealand's lenders face increased risks from the persistent strength of Auckland's property market, which hasn't slowed down as much as anticipated in spite of the Reserve Bank's efforts, says global credit rating agency Standard & Poor's.

The country's four biggest banks - ANZ Bank New Zealand, ASB Bank, Bank of New Zealand, and Westpac New Zealand - have had their stand-alone credit profiles dropped a notch by S&P, which said the rapid rise in Auckland house prices has amplified the risk of a sharp correction, even if such an event remains unlikely.

"We believe that if a sharp fall in house prices in Auckland were to occur, most financial institutions in New Zealand will be adversely affected, even when they do not have a significant exposure to home lending in the city," S&P said in a statement. "This is because of the importance of Auckland to the New Zealand economy - it accounts for about 35 percent of GDP (gross domestic product) and more than one third of the country's population."

In May, the Reserve Bank said the potential for a sharp correction in Auckland's property market had increased, prompting the regulator to impose a second set of lending restrictions on property investors, which come into effect in October. The central bank has struggled to curb house price escalation in the country's biggest city as it's maintained stimulatory monetary policy through low interest rates, thanks to tepid inflation elsewhere in the New Zealand economy, while housing supply has failed to match demand for residential property amid record inbound net migration.

S&P warned a rapid drop in Auckland house prices would probably be a drag on the economy and push up unemployment, as well as sapping business and consumer sentiment.

New Zealand's reliance on foreign funding due to a lack of domestic savings exacerbated the risk, which meant local financial institutions would face a significant increase in credit losses if it eventuated.

"Consequently, we have revised our assessment of the stand-alone credit profiles of almost all institutions in New Zealand, although the impact on their ratings differs in some cases," it said. The stand-alone credit profile is a component of an entity's credit rating, and doesn't include the potential for support from a related group or the government.

New Zealand's big four banks have Australian parents, and S&P affirmed their credit ratings in today's statement.

The local arms of ANZ, Westpac and National Australia Bank's Bank of New Zealand's credit ratings were affirmed at 'AA-' with a stable outlook, while their stand-alone credit profiles were reduced to 'bbb+' from 'a-'. Commonwealth Bank of Australia owned ASB's credit rating was affirmed at 'AA-' with a stable outlook, and the stand-alone profile cut to 'a-' from 'a'.

The weaker profile comes as Australia's banks are strengthening their own balance sheets after the Australian Prudential Regulation Authority proposed lenders lift their capital ratios to mitigate the risk of losses on home loans.

Despite the increased risk, S&P said New Zealand is still a "relatively lower risk banking system by global standards," with a resilient economy, conservative banking regulation, and low risk appetite supporting the sector.

The rating agency said the assessment takes into account the Reserve Bank's restrictions on high loan to value ratio mortgage lending, which have been in place since October 2013, saying the tools had been effective outside Auckland, but only had a temporary effect in the country's biggest city.

"This is contrary to our previous base case expectation that the macro-prudential tools would be more effective in stemming house price inflationary pressures across the country," it said.

Government owned Kiwibank, a subsidiary of New Zealand Post, had its credit rating affirmed at 'A+' with a negative outlook, and its credit profile kept at 'bbb', while Rabobank New Zealand, the local unit of Dutch bank Rabobank Group, had its rating affirmed at 'A' with a negative outlook, and its stand-alone credit profile reduced to 'bbb' from 'bbb+'.

BusinessDesk.co.nz

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