KEY POINTS:
The outlook for New Zealand's Australian-backed banking system is stable but things aren't so rosy for financial institutions overall, says credit ratings agency Moodys.
The strong condition and flexibility of the rated banks (ANZ, BNZ, ASB and Westpac) should allow them to accommodate weakening operating conditions, but the economic slowdown means the financial institutions sector would be viewed as negative for the next 12 to 18 months, Moodys says in its latest report - Banking System Outlook: New Zealand.
The banking sector's financial strength rating of C+ had a stable outlook, consistent with the banks' ability to withstand a turn in the credit cycle, competition or rising funding costs. The outlook was stable for each rated bank.
Assistant vice-president at Moody's Sydney office, Marina Ip, said the banking system remained sound, despite the local economy contracting and being vulnerable to external shocks. However, the consensus was for the local economy to bounce back in 2009, she said.
For the major four banks, strong relationships with their Australian parents provide an important source of funding.
The housing market was weakening, as rising borrowing costs had hit housing affordability.
The Reserve Bank's recent reduction of the official cash rate by 50 basis points would take some time to have an effect.
New Zealand banks' debt and deposit ratings were driven almost exclusively by the ratings of their Australian parents, which had strong strategic incentives to operate in New Zealand, given the trade and cultural links.
Moodys expected a very high level of parental support from Australia because of shared branding, close operational integration and the relatively low risk that the parent would dispose of the rated New Zealand bank.
However, the financial institutions industry in New Zealand had a negative outlook, Ip said.
The entire sector, which includes banks, building societies, credit unions, savings institutions and finance companies, had faced challenges.
The finance company sector had faced the most difficulty. The banking sector was the least challenged of the financial institutions, having generally experienced a "flight to quality".
- NZPA
