S&P cuts NZ bank ratings, citing risks from Auckland housing boom

Standard and Poor's has cut the stand-alone credit ratings for New Zealand's six largest banks because of the increased risks from Auckland's housing boom.

S&P left its issuer credit ratings for ANZ New Zealand, Westpac New Zealand, National Australia Bank's BNZ and Commonwealth Bank's ASB unchanged at AA-, but lowered their standalone credit profiles by one notch each.

Kiwibank's issuer credit rating was unchanged at A+, but its standalone profile was cut one notch to BBB+. Rabobank New Zealand's standalone profile was cut one notch to BBB.

"The rating actions reflect our view that New Zealand financial institutions face heightened risks because of an increase in the country's overall level of economic imbalances over the past three years," Standard and Poor's said.

"In particular, we believe that the rapid rise in house prices in Auckland during this period has amplified the risk of a sharp correction in property prices, although we consider that such a scenario remains unlikely in our base case," the ratings agency said.

A sharp fall in house prices in Auckland would affect most financial institutions in New Zealand, even if they did not have direct exposure to the market.

"This is because of the importance of Auckland to the New Zealand economy; it accounts for about 35 per cent of the GDP and more than one-third of the country's population," Standard and Poor's said.

"Additionally, we believe that a sharp decline in house prices in Auckland would likely be accompanied by weakening in other macroeconomic factors such as a slowdown in GDP and a rise in unemployment," it said.

"The business and consumer sentiment is also likely to suffer as a result, in our opinion. Accentuating these risks are New Zealand economy's external weaknesses in our view."

Credit losses for most banks would significantly increase in such a scenario, it said.

"Consequently, we have revised our assessment of the stand-alone credit profiles (SACPs) of almost all institutions in New Zealand," S&P said.

It added, however, that New Zealand remained a relatively low risk banking system by global standards.

"Indeed, we believe that the increased risk of a sharp correction in house prices is incremental and off a relatively low-risk level," it said, noting that Auckland's house price growth followed a period of restraint in private sector debt and house prices from 2007 to 2011.

"We consider that New Zealand's resilient economy, conservative banking regulation, and low risk-appetite support its banking sector," it said.

"In our opinion, partly tempering these strengths are: the country's moderately high private sector debt; material dependence of the banking system on offshore and wholesale funding; and New Zealand's high external debt and current account deficit."