Banks not out of the woods yet says ratings service

The outlook for New Zealand's banking system remains negative for at least the next 12 to 18 months, reflecting the impact of weaker local and global economies on the asset quality of the banks, says Moody's Investor Services.

But New Zealand is not alone in this outlook, with most banking systems globally facing similar challenges, including the New Zealand banks' Australian parents, also rated negative, says Moody's.

Marina Ip, assistant vice-president at Moody's Sydney offices, said in her report on New Zealand banks that net profit growth and internal capital generation capabilities had been reduced by rising levels this year in impairment levels on loans. Non-performing loans, measured as non-accrual loans and loans more than 90 days past their repayment date, had risen dramatically as delinquencies increased.

Impaired loans were expected to rise slightly above 1 per cent of gross loans made by the banks in this financial year.

Ms Ip said although unemployment was expected to rise from its present 5 per cent level to 7.5 per cent, adding to mortgage borrower stress, New Zealand banks were in a comfortable position because they were owned by Australia's four big banks, collectively accounting for 93 per cent of New Zealand's bank assets.

ANZ National, ASB, Bank of New Zealand and Westpac all had a stable outlook for bank deposits and high Aa2/P-1 foreign currency deposit ratings. They also had C+ rating for financial strength, except ASB which had a B- negative rating for strength and a negative outlook.

"Soft commodity prices will impact exports, and much lower dairy prices for 2009-2010 compared with the past two years will hurt dairy farmers, resulting in potential cash problems," she warned.

Moody's expected New Zealand's economic outlook for the rest of the year to be constrained by lower demand for new housing.

- © Fairfax NZ News