Moody's relaxed about NZ downturn

Moody's Investors Service has maintained its stable outlook on New Zealand banks despite slowing economic growth and the risk a slump in dairy prices could worsen loan quality.

Moody's issued a Banking System Outlook report on Tuesday for New Zealand that said it expected the banks to maintain their strong asset quality and stable profitability because of they were well capitalized and already very profitable.

"Although weak dairy prices, regional property market imbalances and high household indebtedness are key credit challenges, we expect banks' overall asset quality to remain healthy, and their robust capitalization to provide a strong buffer against potential losses," Moody's said.

Lower interest rates, continued strong construction activity in Christchurch and Auckland and stable employment would support loan quality, the ratings agency said.

It was relatively relaxed about an expected halving of dairy incomes this year from record high payouts two years ago, saying banks had been more cautious with lending in 2013 and 2014 than during a previous upturn in prices in 2008.

"The dairy industry had learnt from its experience in 2009 when dairy payouts dropped sharply from record highs. Banks's agricultural exposures will face pressure, but this will be off a very strong base," Moody's said.

It estimated about ten per cent of total bank loans were to dairy farms, but it forecast delinquency rates for rural loans would not rise as high as the 3.92 per cent seen in September 2010 from around one per cent currently.

Moody's also said it expected banks to further tighten their mortgage underwriting criteria to limit their exposures to high house prices in Auckland in particular.

Bank mortgage quality had also improved since the Reserve Bank of New Zealand restricted high loan to value ratio lending in 2013, which reduced the "tail risk" of a slump in house prices.  Borrowers had also pre-paid NZ$14 billion of mortgage repayments in the year to June 2015, giving some leeway in the event of any stress.  

The ratings agency noted New Zealand banks had performed very strongly in its stress test of a "highly adverse economic scenario", with their average tangible common equity ratio falling only to 10.4 per cent from the current 10.9 per cent in the test.