NZ cuts guarantee provision further

The New Zealand government cut provision for guarantees under the deposit guarantee scheme even as the news flow around the finance company sector suggests their performance has only worsened.

In the latest statement for seven months ended January 2010, the government reduced provision further to NZ$771 million from a provision of NZ$776 million as of December 2010. The December provision was cut significantly by NZ$123 million from NZ$899 million in November.

The reduced provision is a little surprising, given just recently one of the bigger finance companies, South Canterbury Finance, was downgraded by Standard & Poor's to BB from BB+ with a warning that a further downgrade is likely.

Earlier this month, the compulsory requirement for non-bank deposit takers to have a credit rating from an approved ratings agency came into effect.

According to the Reserve Bank of New Zealand, of data that detailed ratings for 29 institutions, only 27 per cent of them received a rating of better than BB, which is the minimum rating required for the guarantees to get extended beyond October 2010.

The RBNZ said 46 per cent managed to scrape through with a BB rating and the remaining 27 per cent received a rating below BB.

As of the end of January 2010, the government had guaranteed deposits of 73 financial institutions, totalling NZ$133 billion. The provision is, however, made only for institutions with deposits less than NZ$5 billion and is made net of expected recoveries. Potential losses from institutions with deposits over $5 billion is considered remote, hence no provisions are made.