Coronavirus Covid-19: Fitch downgrades bank ratings on tough economic conditions

Fitch said it expects GDP to shrink in both markets in the first half of 2020.

International credit ratings agency Fitch has downgraded its outlook for the Australian banks and New Zealand subsidiaries from AA- to A+.

The move has been driven by the tougher operating environment. Ratings for capital positions and liquidity remain stable.

The move reflected "expectations of a significant economic shock in the first half of 2020 due to measures taken halt the spread of the coronavirus, followed by a moderate recovery through 2021," Fitch said.

The downgrade - which applies to local banks BNZ, Westpac, ANZ and ASB - primarily relates to the outlook on the operating environment score for banks in both Australia and New Zealand.

It has been moved from to negative from stable as part of this action.

"The latest ratings reflect what's happening in the environment in which banks are operating rather than the banks themselves," said New Zealand Bankers' Association chief executive Roger Beaumont.

"Our banks are in a strong position in terms of capital and liquidity to meet the Covid-19 challenge. That means they can continue to work hard to help affected customers get through this."

Fitch said it expected GDP to shrink in both Australia and New Zealand in the first half of 2020 with only a modest recovery starting in the second half and extending into 2021.

Unemployment was likely to spike sharply and remain very elevated relative to pre-pandemic levels even after the recovery is underway.

"The current operating environment scores incorporate this base case and the outlook on this factor would likely be revised to stable should the baseline case scenario eventuate," the agency said.

"Conversely, a significant extension of the downturn into the second half of 2020, or only a shallow recovery that results in much weaker economic conditions through 2021 and beyond could result in a reduction of the score in both markets."

However Fitch was clear that the capital and liquidity positions of the banks remained stable.

"Buffers built in recent years should be sufficient at current scores under our baseline case," Fitch said. "We have retained a stable outlook for this factor. Funding and liquidity is supported by sound liquidity management and the significant support provided by the Australian and New Zealand central banks, with limited short-term pressure likely. The outlook for this factor remains stable as a result."

Fitch said it expected banks would now maintain stronger financial profiles - particularly for key financial metrics.

"We expect these conditions to affect asset quality and earnings in particular," it said.

"Support measures implemented by the government, regulators and banks themselves should alleviate some of the asset-quality pressure that will emerge from this downturn, particularly within the next six to 12 months."

• Covid19.govt.nz: The Government's official Covid-19 advisory website