NZ banks top five fears

New Zealand has the world's most optimistic banking industry, according to new research, but that doesn't mean there aren't a few concerns keeping local bankers awake at night. Christopher Adams looks at their top five fears outlined in consulting firm PwC's latest Banking Banana Skins report.

As New Zealand banks become increasingly digital, technology-related concerns have jumped ahead of more traditional dangers such as the economic outlook.

PwC's banking and capital markets leader Sam Shuttleworth said this wasn't particularly surprising.

"As the industry increasingly embraces technology ... focus on how to better manage these risks has resulted from concerns about vulnerability of outdated systems to cyber crime and outages," he said. "Banks, however, are recognising they cannot only be concerned with their own systems and processes but also with risks arising from third party outsourcing and offshoring activities."

At a global level, the biggest risk considered to be facing the banking sector was the macro-economic environment, with technology in fourth place, according to the report.

Banks pour a lot of resources into managing their social media presence, but that doesn't eliminate the potential for reputation damage online.

One unnamed treasurer of a New Zealand bank was quoted in the report as saying: "Once [negative social media commentary] gets hold it becomes true, no matter how false."

Social media risk has risen to second place in this year's survey from seventh last year. It has also risen eight places in global rankings to 11th place.

The report said the rise of social media was forcing banks to fundamentally change the way they went about protecting their brands.

"Criticisms ... through social media can cause reputational damage [whether well founded or not]," it said.

However, another Kiwi banker disagreed: "Most of the stuff social media catches is low-level noise that no one really remembers."

The report highlighted growing concern about a potential failure of the global economic recovery.

"Many people fear the economic recovery will fail and cause severe damage to the banking system, which is a worrying prospect," PwC said.

Global financial markets have been volatile this year on the back of growing concerns about the state of growth and the economic outlook for China.

The first US interest rate rise since 2006, which may take place this month, could also hurt emerging markets.

Shuttleworth said macro-economic risks remain high in the banking community, reflecting the damage -- both financial and reputational -- such risks posed. "They will have downstream consequences and a good example of that is in the dairy sector and ... soft commodity prices."

Conduct practices rose one place from 2014 to become the fourth biggest risk in the latest report.

PwC said this was because of a perceived failure by banks to achieve sufficient "culture change" in the management of business practices, despite regulatory pressure.

In New Zealand, for example, KiwiSaver providers - which include banks - have been criticised by the Financial Markets Authority for questionable conduct relating to sales practices around the savings scheme.

PwC said conduct risks had risen to their highest ever ranking in this year's survey. They were ranked eighth globally.

"Poor practices in some parts of the market could be damaging to all," the report said.

The risk of a housing bubble fuelled by quantitative easing overseas was a major concern for many local survey respondents.

"The heated state of New Zealand's largest property market, the Auckland market, and the likelihood of a market correction within that timeframe [two-to-three years] pose earnings risks and the prospect of some instability," a risk manager, who wasn't named, said in the report.

Shuttleworth said quantitative easing in places like Europe was contributing to lower wholesale interest rates and so lower mortgage rates in this country. Another respondent said historical models for pricing risk were becoming ineffective. "Many models are redundant but continue to be used."

Shuttleworth said the Reserve Bank was responding with active measures, such as loan-to-value ratios.

Read the full report here: