Moody's: New Zealand banking system outlook stable on strong bank fundamentals, despite weaker economic growth

Moody's Investors Service says its outlook for the New Zealand (Aaa stable) banking system is stable, based on the banks' healthy capitalisation, strong asset quality and stable profitability, which offset the risks arising from weaker economic growth.

"Stable employment levels and the low interest rate environment will continue to support New Zealand banks' good asset quality and stable profits over the next 12-18 months," says Daniel Yu, a Moody's Vice President and Senior Analyst.

Moody's analysis is contained in its just-published report "Banking System Outlook: New Zealand," an overview of credit trends affecting the banking system in the next 12-18 months.

"The banking system's outlook is stable despite weak dairy prices, property market divergence and high household leverage," says Yu.

While these factors are key credit challenges, Moody's expects the banks' asset quality to remain healthy, with strong capitalization buffering against potential losses.

In addition, the Reserve Bank of New Zealand's monetary easing -- i.e. its two consecutive 25 basis point policy rate cuts in June and July this year -- will help temper debt-servicing costs for New Zealand households.

Moody's also expects economic growth to decline slightly to 2.9% in 2015 and 2.5% in 2016, down from 3.3% in 2014, as dairy prices continue to slide and pressure export incomes. However, ongoing construction activity, high net migration and lower interest rates will support the broader economy.

Stable employment conditions and low interest rates will underpin asset quality, despite the banks' risk exposure to low dairy prices and property market imbalances. Moody's notes that the dairy industry is more cautious than in previous years, when debt levels rose sharply in response to high prices.

Banks will also continue to tighten mortgage underwriting, partlyas a result of central bank-led measures to restrict investor mortgage growth in the rapidly-growing Auckland housing market.

Furthermore, Moody's expects funding conditions to remain favourable as deposit growth outpaces loan growth.

But it also notes that New Zealand banks' wholesale funding makes up 24% of tangible banking assets; a key sensitivity, given that just over half of these funds were sourced offshore.

Banks' profitability will remain stable despite possible downward pressure on loan rates from declining interest rates and rising competition for high-quality mortgages, notes Moody's.

The rating agency's low government support assumptions for the banks reflect the country's Open Bank Resolution policy, which provides the government with a framework to impose selective losses on bank creditors. However, the country's four largest banks still benefit from one notch of government support in their senior debt and deposit ratings, because of their importance in funding New Zealand's net external liabilities and the complexity of their resolution.