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S&P Global Ratings revises NZ economic trend to positive

S&P Global Ratings revised its risk trend on New Zealand to positive from stable after housing-related imbalances in the economy moderated.

"We are revising our economic risk trend to positive given our view that the risks facing New Zealand's financial system have stabilised. This reflects a slowdown in the rapid rate of growth in residential house prices and private sector credit extension as the credit cycle matures," the ratings company said in a statement.

However, "we do not expect that an improvement in economic risk will impact our issuer or issue credits ratings on New Zealand bank and non-bank financial institutions," it said.

The key drivers in the slowdown of house prices and private sector credit growth are tighter bank lending standards and the macro-prudential tools implemented by the Reserve Bank of New Zealand. It says government policy initiatives may contribute to a continued slowdown in the year ahead.

The central bank sought to slow demand in the property market in recent years through the use of loan-to-value ratio restrictions, first implemented in 2013. More recently, the government banned the sale of residential property to foreign buyers under new rules that came into effect this month.

S&P Global Ratings, however, still believes the risk of a sharp correction in property prices remains elevated because of the historical build-up.

If a sharp correction were to occur, the New Zealand economy's external weaknesses - in particular its persistent current account deficits - would amplify the impact on financial institutions, it said.

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It said there is potential for an easing of the economic risks the banking system faces if the four-year average growth of inflation-adjusted house prices remains below 8 percent, and the four-year average growth of private sector debt to GDP remains below 2 percent.

It also said the trend for industry risks in New Zealand's banking sector is stable. While the banking sector's funding profile remains a weakness for the banking system "we also consider the country's stable industry structure, and banks' restrained risk appetite remain supportive of the banking industry and industry risk," it said.

S&P noted that in Australia, the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry had highlighted a number of issues relating to conduct, culture, vertical integration, governance, and regulatory effectiveness of that country's financial system.

However, while New Zealand's major banks are 100 percent Australian-owned "to date we have not observed any adverse reports highlighting significant conduct or governance related weaknesses for the New Zealand banks relative to their Australian owner," it said.

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