Bad debts peak in late 2010

The Reserve Bank of New Zealand expects problem loans to peak by mid to late 2010 with improvement in asset quality expected to lag the expected economic recovery significantly.

Writing in its half-year Financial Stability Review, published yesterday, the RBNZ said it expected asset quality to deteriorate further. The RBNZ has warned that banks will need to ensure their level of provisioning is enough to meet anticipated credit losses.

Citing data current only to June 2009, the RBNZ noted the steady rise in the problem loan levels of banks over the first half of the year, with the ratio of non-performing loans to total lending of all registered banks rising by 0.5 percentage points over the first half to 1.5 per cent.

If the RBNZ included data from the September 2009 quarter (and three of the big banks have reported financial statements for that period, though they are still to file regulatory disclosures) the ratio would be even higher. The drag on profits from problem loans in New Zealand was one of the main features of the just-completed profit reporting season.

The problem is also concentrated in the Australian-owned big banks in New Zealand. Locally owned banks on the whole have escaped the surge in bad debts for the major banks.