NZ bank credit losses will rise from low levels, S&P says

Bank credit losses are set to rise but they remain strong, says Standard and Poor's. Photo / File.

International ratings agency Standard & Poor's says the big four New Zealand banks are in a strong position to weather the coronavirus crisis although credit losses are likely to rise from currently very low levels.

The four banks are still on "an extremely strong footing and we don't see any need to change the ratings or even expectations of any change," S&P bank analyst Sharad Jain told BusinessDesk.

That also goes for the degree of support Australia's big four banks, which own the New Zealand big four, are expected to be able to provide to their trans-Tasman subsidiaries.

On Monday, the Reserve Bank of New Zealand deferred the introduction of higher capital requirements for NZ banks by a year, freeing up an additional $47 billion for the banks to lend to help support New Zealand businesses and consumers through the covid-19 crisis.

The Australian Prudential Regulation Authority and other regulators are preparing to put a massive amount of regulatory change impacting banks on ice so they can "support households and businesses through this challenging period," Australia's Council of Financial Regulators said yesterday.

Jain said S&P has looked at these developments as to whether they might "make us question the support for the subsidiaries" and concluded that they wouldn't mean any material change.

Jain said his comments should be taken as being subject to change "in a rapidly changing" situation.

"The key point is that losses have been at extremely low levels and there's significant head room, in our view, for those losses to go up," he said.

In a note on the Australian parent banks, S&P said they can absorb the increase in credit losses and disruption to funding markets resulting from covid-19 "without posing any immediate or significant risk to the banks' creditworthiness."

The ratings agency expects the Australian banks' credit losses will nearly double in 2020 to about 30 basis points of gross loans and advances from 2019's historic lows.

"Nevertheless, in our view the credit losses should remain low compared with international peers as well as our expected long-term averages," S&P said.

Jain said much the same situation would apply to the New Zealand subsidiaries. Nor does S&P have any bank-specific concerns.

While S&P hasn't looked at New Zealand's smaller banks, the next largest, Kiwibank is owned by government-owned shareholders and there's no reason to believe any of them are at any immediate risk, he said.

"We do see significant buffers currently, but it is a rapidly changing situation."

S&P is currently expecting the covid-19 outbreak will peak some time before the end of June, though it noted high uncertainty about the rate of spread and the timing of the peak.

"Notwithstanding our relatively benign outlook on the Australian banks, we expect that a longer-lasting and more severe impact than our revised base case could precipitate significant problems for the Australian banking system."

The Australian banks could be challenged in accessing offshore wholesale funding if global markets remain dislocated or if Australia's economy deteriorates significantly.

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