Fitch Solutions says New Zealand bank lending growth should pick up this year to 5.2 percent from 4.7 percent in 2018 and then grow by 5.2 percent in 2020.
That will reflect the Reserve Bank’s “plans to unwind mortgage lending restrictions and rising agricultural loan growth. Additionally, New Zealand’s banks remain financially sound and possess adequate capital buffers in the event of market turbulence,” Fitch says.
It emphasises that Fitch Solutions and Fitch Ratings analysts operate independently and don’t share data or information.
“We expect real GDP growth in New Zealand to accelerate slightly over the coming quarters to 2.8 percent in 2019 from 2.6 percent in 2017 due to expansionary fiscal measures, lower unemployment and improving terms of trade which will help to support loan growth to households and corporates,” Fitch says.
“The number of new job advertisements increased to 6.7 percent in December 2018 from 2.9 percent in June 2018 on a three-month rolling average basis and we expect the improving employment outlook to support private consumption over the coming quarters.”
The unemployment rate at Dec. 31 stood at 4.3 percent and the participation rate at 70.9 percent of the working age population.
“This will increase confidence in the direction of the economy, thus boosting credit demand from both households and corporates.”
Mortgages account for about 57 percent of total bank lending and the latest easing of loan-to-valuation restrictions on bank lending came into force from Jan. 1, having been announced in late November.
“We believe this will help to open up the housing market to potential buyers who were previously unable to secure loans, thus supporting housing-related loan growth,” Fitch says.
“Indeed, we have already observed a significant increase in the purchases of homes with LVRs above 80 percent to 10.6 percent in January 2019 from 6.7 percent in January 2018 and we expect this trend to continue over the coming quarters,” it says.
“Furthermore, the index for the six-month expected change in residential mortgage loan demand was positive at 0.4 percent, as measured by the RBNZ’s latest Credit Conditions Survey in September 2018. This indicates that a majority of banks expect an increase in housing loan demand over the next six months.”
Advertised mortgage rates have been falling. For example, ANZ Bank’s special two-year fixed rate offer has dropped from about 4.65 percent a year ago to 4.29 percent now.
“Additionally, we expect agricultural loans, which comprise 14 percent of total loans, to pick up over the coming quarters due to our positive outlook for the dairy sector,” Fitch says.
“We expect dairy prices to rise to an average of US$15.40 per hundredweight in 2019 and U$15.60 cwt in 2020 from US$15.18 in 2018 with an increase in dairy demand from China due to rising consumer incomes and the lack of domestic supply due to a shrinking local dairy herd,” it says.
“This would support New Zealand’s dairy sector and result in a boost in demand for loans from both households and corporates. Indeed, agriculture loan growth has been on an accelerating uptrend since early 2018 and loan growth rose to 3.6 percent in January 2019 from 2.1 percent year-on-year in November 2017.”
New Zealand’s banks remain financially sound with high asset quality – non-performing loans as a share of total loans for the big four banks average 0.4 percent, as measured by RBNZ – “comparing favourably with the OECD average of 2.5 percent,” Fitch says.
It puts the tier 1 capital ratio of the big four banks at 14.5 percent and their total capital at 15 percent of risk-weighted exposures.
“This demonstrates the ability of New Zealand’s banking sector to withstand unanticipated losses in the event of an economic downturn,” Fitch says.
“Additionally, New Zealand’s banks remain highly profitable with the return on equity ratios of the four largest banks at 14 percent compared with the average bank ROE ratio of 11.9 percent.”