Fitch Ratings says the major New Zealand banks may be facing weaker growth prospects due to rising borrowing rates and credit rationing as a result of the Reserve Bank’s proposals to near double the minimum amount of capital they have to hold.
But the capital requirement changes aren’t likely to impact the banks’ strong franchises and the strength of their sustainable profits through the business cycle means they should be well-positioned to meet the new requirements, the international ratings agency says.
“High household debt is broadly stable but is a key risk. Households remain susceptible to a shock in interest rates or the labour market, although this is not Fitch’s base case,” it says.
“Partly offsetting this risk is the low interest rate environment which has resulted in the percentage of household income used for debt-servicing remaining lower than in 2009.”
Fitch says it expects a modest deterioration in asset quality over the next year, partly because the banks’ impaired loan levels are at historical lows.
“Significant deterioration is unlikely to emerge unless there are large external shocks. Earnings growth is also likely to remain under pressure due to slowing credit growth and rising compliance and investment expenses,” it says.
Fitch still expects the New Zealand banks will outperform similarly rated peers – it rates all four of them, ANZ, ASB. Bank of New Zealand and Westpac, at “AA-,” with a stable outlook for ANZ and Westpac and a negative outlook for the ratings of the other two banks.
“Changes in the parents’ ratings are likely to be also reflected in their New Zealand subsidiaries’ ratings,” it says.
The big four banks are owned by Australia’s ‘four pillars’.
The Reserve Bank is proposing to lift the minimum tier 1 equity capital the big four banks have to hold from 8.5 percent currently to 16 percent. They currently average about 12 percent and are likely to want a buffer above the minimum level.
Earlier this month, Fitch said warned that it may downgrade its ratings of New Zealand’s big four banks if the Reserve Bank’s minimum capital requirements become so onerous that their Australian parents look to divest them.