Banks facing big jump in bad debts

New Zealand banks’ credit losses will rise to about 12 times those of 2019 before easing because of the coronavirus crisis, according to international ratings agency Standard & Poor’s.

“A contracting economy, rising unemployment and weak consumer and business sentiment will affect banks’ asset quality metrics,” said S&P analyst Lisa Barrett in an S&P publication on global banks.

“We forecast that annual credit losses will peak at about 80 basis points of gross loans by fiscal 2021, about 12 times their historical low in fiscal 2019.”

But, she said, “most NZ banks retain good headroom within their earnings to absorb our forecast sizeable increase in credit losses in conjunction with a significant contraction in interest income.”

Standard & Poor’s is forecasting that New Zealand’s economy will contract by 5 per cent in 2020 before bouncing back to 6 per cent growth in 2021.

New Zealand banks’ significant dependence on offshore short-term borrowing and the nation’s persistent current account deficits combined with fluctuating commodity prices all make the country vulnerable to external shocks, she said.

But she envisages no change to the four major NZ banks’ strategic importance to their Australian parents. Fellow analyst Sharad Jain is forecasting the Australian banks’ credit losses will rise to about six times their levels in 2019 before easing.

Both analysts said there was a one in three chance that the economic hit to the banking sectors of each country turns out to be more severe or prolonged than S&P’s base case.