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New Zealand's major banks and their Australian parents have coped with the sub-prime crisis well so far, but their reliance on international money markets may leave them vulnerable to a ratings downgrade, says International ratings agency Moody's.
In a update on the sector, Moody's senior vice-president Patrick Winsbury said Australasian banks had "weathered the stresses in financial markets well to date, despite a significant structural reliance on wholesale funding".
Winsbury pointed out the banks' minimal exposure to US sub-prime-related assets, their sound profitability and capitalisation supported by "economic prospects that remain superior to many other developed economies", growing demand for their recent debt offerings, solid growth in deposits, and their relatively low exposure to higher risk mortgage borrowers.
However, Winsbury also said the "extended global liquidity crisis is creating longer-lasting credit negatives which, at the margin, have the potential to impact some ratings of Australian and New Zealand banks".
There were indications that the banks were raising money on international markets on shorter terms "which is increasing the volume of funding to be rolled over in 2009".
Any indications that banks were favouring lower cost short-term funding over longer term higher cost options, or were growing their assets rather than building up capital, "are likely to be viewed as rating negative," said Winsbury.
Focusing on NZ, Winsbury said the slowing economy meant banks' asset quality was expected to decline, "but mostly remain within current rating tolerances".
"A key area ... may be the housing sector: price declines are occurring and household leverage is high."