Property prices impact on S&P’s assessment of NZ banking sector

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A plunge in property prices is a key risk factor for banks in New Zealand, according to a new report from Standard & Poor’s.

Friday, March 27th 2015, 9:52AM 1 Comment

by Miriam Bell

In “Asia-Pacific Banking Sector Outlook 2015: Six Shape Shifters That May Reset The Region's Course”, the financial services company discusses the key factors it believes will determine the future for banks in the Asia-Pacific region.

The six key factors (or “shape shifters”) are:

1. Government support - and what could it happen were it to diminish from its current levels.
2. Slowdown in domestic economies
3. Eurozone risks
4. A major disorderly property adjustment in China
5. Plunge in property prices
6. Rising interest rates

In the view of Standard & Poor’s, any one of these factors could impact on the ability of banking systems within the Asia-Pacific region to a new phase of global regulation.

For New Zealand, a plunge in property prices is highlighted as an intermediate risk factor for the banking system.

The report says this is because home loans and real estate-related loans account for a significant percentage of bank lending in New Zealand – as is also the case in Australia, Singapore, Malaysia, China and Hong Kong.

“Furthermore, private sector indebtedness in these countries is relatively high by international standards and, to varying degrees, property prices are rising and/or already high.”

However, the report adds that these factors are even considering that asset-quality ratios for many banks in these countries are sound by international standards.

“There is some scope to absorb higher problem loans associated with property lending in the context of current ratings and outlooks.”

The Asia-Pacific “shape shifters” report comes hot on the heels of Standard & Poor’s annual outlook for the New Zealand banking sector, which was released last week.

In that outlook, Standard & Poor’s also highlighted a sharp correction in property prices as a downside risk to the banking industry.

It warned that persistent house price inflation could increase the risk of a sharp property price correction in the future, particularly if the economy was to suffer an external shock leading to higher credit losses for the banks.

“Consequently, we consider the stand-alone credit profiles of banks and credit unions in New Zealand as remaining subject to negative pressures, as reflected in a negative rating outlook on a number of these banks and credit unions.”
While the high LVR "speed limits" and monetary policy tightening have had a dampening effect on house price inflation, based on recent data in Standard & Poor’s view there could be a resurgence of house price inflation.

This means that if the economic risk builds beyond their threshold levels, Standard & Poor’s could lower their ratings on New Zealand banks and credit unions that do not benefit from parent support.*

However, Standard & Poor’s base case expectation for the New Zealand banking system sees asset-quality metrics remaining at around their current cyclical low over the short-to-medium term, supported by sound economic growth prospects.

The relatively low level of credit losses over the next two-to-three years will continue, underpinning the strong profitability performance metrics of the New Zealand major banks, it said.

*It also means the LVR "speed limits" are likely to be left in place for longer.

Tags: property investment

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