Moody’s gives verdict on NZ banking system

Despite weaker economic growth, Moody’s vice president and senior analyst, Daniel Yu, said stable employment rates and a low interest-rate environment will continue to support New Zealand’s banks over the next 12 to 18 months.

In addition, Moody’s said the Reserve Bank of New Zealand’s two consecutive 25-basis-point rate cuts in June and July will help temper debt-servicing costs for households.

“Banks’ profitability will remain stable despite possible downward pressure on loan rates from declining interest rates and rising competition for high-quality mortgages,” Moody’s said in a statement.

“Banks will also continue to tighten mortgage underwriting, partly as a result of central bank-led measures to restrict investor mortgage growth in the rapidly growing Auckland housing market.”

Moody’s expects funding conditions to remain favourable as deposit growth outpaces loan growth.

However, the ratings agency noted that NZ banks’ wholesale funding makes up 24 per cent of tangible banking assets, which it flagged as a key sensitivity, given that just over half of these funds were sourced offshore.

Moody’s said its assumption of low government support for the banks reflects New Zealand’s Open Bank Resolution policy, which provides the government with a framework to impose selective losses on bank creditors.

“However, the country’s four largest banks still benefit from one notch of government support in their senior debt and deposit ratings, because of their importance in funding New Zealand’s net external liabilities and the complexity of their resolution,” Moody’s concluded.