HOUSE PRICE ALARM
Rate rise risk after bank downgrade
Adowngrade of the big four New Zealand banks could raise the pressure on lending rates, says Massey University banking expert David Tripe. International ratings agency Moody’s Investors Service has downgraded the credit ratings of the four big New Zealand banks in line with downgrades of their Australian parents, citing concerns about the housing market across the Tasman.
“They [Moody’s] are certainly concerned about housing risk in Australia,” Tripe said. “That’s a big driver of it,” he said. “Sooner or later, booms have got to stop.”
The long-term ratings of ANZ, Commonwealth Bank (CBA), National Australia Bank (NAB) and Westpac were downgraded to AA3 from AA2, and their baseline credit assessments (BCAs) went to A2 from A1.
Moody’s said it had downgraded the long-term ratings of ANZ Bank New Zealand, ASB Bank (CBA), Bank of New Zealand (NAB) and Westpac NZ to A1 from AA3. The rating outlooks of these NZ banks have been revised to stable from negative, it said.
Tripe said the downgrades could put about 10 basis points of upward pressure on Kiwi lending rates.
In Australia, Moody’s move has focused attention on the risks associated with Australia’s A$1.51 trillion ($1.58t) of mortgage loans.
“The resilience of household balance sheets and, consequently, bank portfolios to a serious economic downturn has not been tested at these levels of private sector indebtedness,” Moody’s said.
The Aussie banks are already bracing for an imminent announcement from the Australian Prudential Regulatory Authority, which is due to say whether it will require the banks to hold more capital against their mortgage books as part of a wider update on capital requirements.
The downgrades come as wholesale interest rates fall in the New Zealand wholesale money market, where the five-year swap rate has dropped to 2.68 per cent from 3.07 per cent at the start or the year.
At the same time, banks face higher funding costs as they compete more closely to attract retail deposits.
Added to the mix is the Reserve Bank’s official cash rate, which is expected to hold at 1.75 per cent when the bank reviews it tomorrow.
Moody’s said the affirmation of the
Sooner or later, booms have got to stop. David Tripe, Massey University banking expert
four New Zealand banks’ baseline credit assessments reflected their strong stand-alone financial profiles.
“The banks’ asset quality is currently very strong while capital remains robust,” it said.
“These favourable characteristics provide the four New Zealand banks with a strong buffer to withstand rising risks in the housing market as household leverage and house prices continue to rise, increasing sensitivity to employment shocks, or an eventual rise in interest rates.”
More than 60 per cent of the Australian banking system’s loan book is in residential property, nearly 20 percentage points more than second-placed Norway and more than double the United States ratio, according to data from the International Monetary Fund.
In Hong Kong’s frothy housing market, the ratio stands at only 14 per cent, according to Bloomberg.
The New Zealand proportion of lending in residential property is estimated to be about 56 per cent.
In May, Moody’s main competitor, Standard & Poor’s, downgraded almost all the financial institutions in Australia because they face an “increased risk of a sharp correction in property prices”.
Twenty-three institutions, including AMP, Bank of Queensland, Bendigo and Adelaide Bank and Credit Union Australia, received downgrades to their stand-alone credit profiles from S&P.