The IMF has just released a working paper on the resilience of the New Zealand banking system. The top 4 banks hold more than 90% of all bank assets in New Zealand (despite the fact that there are some 22 registered local banks), so the report sought to analyse the capital adequacy of the main banks against various risks. The overall view is that the banking sector is well capitalised and could withstand a lending shock in one and maybe two, of its major lending areas. This is no surprise and has been well recorded by commentators to date. However it is clear that bank lending to already highly indebted households coupled with large exposures to the agricultural sector remain areas of concern. While the current rise in house prices particularly in Auckland will assist personal balance sheets, ongoing servicing of loans by consumers is a different matter.
Servicing is materially dependent on the level of unemployment and the level of interest rates. Unemployment in New Zealand remains relatively high and despite a slow recovery in the economy, companies have been reluctant to invest in new productive capacity and to hire new staff and this trend is consistent with what we see offshore in many of the large western economies. By contrast the outlook for interest rates and the potential impact on loan servicing and hence non performing bank loans, is more difficult to assess. When consumers borrow funds, banks test their servicing ability assuming that interest rates may rise but there is no doubt that a significant rise in mortgage rates over time would make servicing more difficult.
Elsewhere, bank lending to the corporate sector at around 27% of total assets is considered to be more risky than residential property loans but the corporate sector appears to be in reasonable health. Any significant slowdown in Australia and China would be of concern particularly if this was combined with a decline in New Zealand’s main commodity prices but the overall outlook for these sectors for 2013 is satisfactory. Additionally, the major bank in New Zealand the ANZ/NBNZ Group, has a market share of around 33%. This is a very large concentrated slice of the market, so any deterioration in the local economy through consumer financial pressure and/or falling rural sector prices would have significant flow-on effects. But with the local banking sector carrying average capital of about 13% of total assets and the majority of lending (about 45%) directed to a very diversified book of residential property where people tend to service mortgage debt reliably suggests that the sector continues to look in reasonable shape.
Jonathan Windust
Portfolio Manager