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NZ banks strong enough to weather downturn, dairy slump

NZ banks strong enough to weather downturn, dairy slump

By Paul McBeth

Aug. 4 (BusinessDesk) - New Zealand's lenders are in a strong enough position to weather slowing economic growth over the next year-and-a-half, while slumping dairy prices aren't expected to pose as big a threat as they did in 2009, says Moody's Investors Service.

The global rating agency has a stable outlook for the nation's banking system, built on the expectation the country's lenders will maintain strong asset quality and stable profitability in the face of a slowing economy. Moody's anticipates slower gross domestic product growth of 2.9 percent in 2015 and 2.5 percent in 2016 as lower dairy prices crimp export incomes, though building activity in Auckland and Christchurch, persistently strong inbound net migration, and lower interest rates will support the economy.

"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 capitalisation to provide a strong buffer against potential losses," Moody's analyst Daniel Yu said in the report. "Banks continue to be exposed to risks from current weak dairy prices and property market imbalances. However, their dairy sector exposures will benefit from a high degree of borrower caution in recent years."

Fonterra Cooperative Group is expected this week to cut its forecast payout to farmers as global milk prices continue their decline this year, putting pressure on about a quarter of dairy farming operations which have been trading in negative cash flow.

Moody's said dairy farmers have been increasingly cautious since 2009, when the dairy payout dropped sharply, and were wary even when Fonterra made a record payout in 2014. The rating agency expects a modest rise in dairy bad debt, with the sector accounting for about 70 percent of agricultural loans, but expects this impact to be "far milder" than the previous cycle when non-performing loans rose to 3.92 percent of total agricultural lending in September 2010, from 0.2 percent in September 2008.

"We expect the current decline in dairy prices to have a less severe credit impact compared to that from the 2009 decline," the report said. "Farmers knew well in advance that 2015 prices would be lower than 2014 levels, allowing them to manage down expenses and defer any significant capital expenditures."

The rating agency expects bank profits to remain stable, as cheaper funding costs help offset smaller lending margins stemming from stiff competition for residential mortgage customers.

"New Zealand banks boast above-peer margins and operating efficiency, which reflects the industry's concentrated structure and banks' considerable pricing power," the report said. "The strong efficiency of New Zealand banks are driven by their relatively simple-to-deliver housing loan businesses, as well as investments in technology, which have resulted in significant productivity improvements."

Moody's said Reserve Bank efforts to reduce the systemic risk from rapidly rising house prices in Auckland with restrictions on low-equity home loans had reduced lenders' exposure to high risk mortgages, though hadn't had much impact on house price growth.

The Reserve Bank plans to impose additional curbs on residential investment lending in Auckland from October, while relaxing the mortgage restrictions in the rest of the country to try and take the heat out of the city's buoyant market.

Moody's expects banks' asset quality will remain healthy over the next 12 to 18 months, supported by low interest rates and stable employment conditions, and said New Zealand lenders perform "very strongly in our stress test."


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