S&P expects NZ banks' Covid-19 losses to peak at $4.7b

Standard & Poor's expects New Zealand 'big four' banks' collective Covid-19-related losses will peak at about $4.7 billion. Photo / File

Credit rating agency Standard & Poor's expects New Zealand 'big four' banks' collective Covid-19-related losses will peak at about $4.7 billion but they're well-placed to absorb such losses so it shouldn't affect their capital positions.

The international ratings agency has made similar comments about Australia's four major banks, which own the big four New Zealand banks.

In their first-half results, three of the four New Zealand subsidiaries, ANZ Bank, National Australia Bank-owned Bank of New Zealand and Westpac, provided a total $455 million in charges against profits for future losses as a result of the coronavirus crisis.

The market is expecting Commonwealth Bank of Australia, which owns ASB Bank, to report similar provisions when it releases its Pillar 3 report today.

S&P analyst Lisa Barrett said the agency is expecting a similar magnitude of Covid-19-related losses for the Australian parents of about A$20 billion ($21.2b).

Three of them have reported A$3.44b of provisions for such losses to date.

More detail expected

The Australian banks' Pillar 3 reports "historically have been fairly light in terms of content" but the market is expecting CBA will provide more detail and she expects any provisioning will be in line with what the other three banks have reported, Barrett said.

The range of provisions was wide, from NAB's A$807m to Westpac's A$1.6b.

Her fellow analyst Nico DeLange told BusinessDesk these forecasts are based on relative profitability, net interest income and other income falling through the crisis and assumptions about costs.

With interest rates set to remain lower for longer, the banks will also face margin pressure.

However, "even under severe scenarios, they will still have capacity" to absorb such losses, DeLange said.

'A lot stronger'

Since the global financial crisis, banks worldwide and in New Zealand have strengthened their capital and improved funding and liquidity as well so "they're a lot stronger," he said.

But he stressed that in making assessments of the banks this early in the crisis, "the word 'uncertainty' creeps in."

DeLange doesn't expect the New Zealand banks will bow to pressure from the government to significantly relax lending standards.

"Conservatism around lending practices has increased since the GFC. There has been a general tightening of lending standards post-GFC," he said.

Given the current level of uncertainty about the economic outlook, "I don't think it's likely banks will significantly lessen lending standards. They will remain cautious."

Figures released on Friday certainly bore that out: the banks have lent just $23m under the government's $6.25b business finance guarantee scheme under which the government will bear 80 per cent of the risk.

Although S&P is expecting New Zealand banks' margins will be squeezed through the crisis, their starting point at above 2 per cent is significantly higher than their parents and other international banks, DeLange said.

For example, while ANZ New Zealand reported its net interest margin fell 5 basis points to 2.33 per cent in the six months ended March compared with the same six months of 2019, its Australian parent reported its NIM fell to 1.69 per cent from 1.72 per cent.

Skinnier margins abroad

In Europe and countries such as Japan, where central banks have been printing money since the GFC, NIM is "much closer to 1 per cent than 2 per cent," he said. The Reserve Bank of New Zealand has only recently started printing money through buying bonds and other assets from the banks in a process known as quantitative easing.

"New Zealand banks, even more so than their Australian parents, are very profitable. We definitely expect those NIMs to come down."

How much NIMs will contract will depend on how long we're in the current low interest rate environment, DeLange said. But in this the New Zealand banks have an advantage over their parents because so much of their mortgage lending is at fixed-term interest rates – the parents' mortgage lending is mostly done at variable rates.

That means it will take longer for the New Zealand banks' NIM to fall. About 60 per cent of the banks' balance sheets are housing loans.

S&P is expecting the crisis will have an impact on New Zealand house prices but DeLange noted prices had risen about 10 per cent in the last year, so a 10 per cent fall "will just wipe out the appreciation that's happened over a year."

Lower immigration, higher unemployment, poor consumer sentiment and lower economic activity will all play a part in dragging house prices lower, he said.

Reserve Bank data shows the big four banks have considerably more than their statutory minimum common equity capital of 8.5 per cent of risk-weighted assets at December 31, ranging from ANZ Bank at 10.8 per cent through to ASB at 11.7 per cent, while total capital ranged from ANZ at 13.6 per cent to Westpac at 15.9 per cent.

In mid-March, the RBNZ deferred the introduction of higher capital requirements for NZ banks by a year, freeing up an additional $47b for the banks to lend to help support New Zealand businesses and consumers through the Covid-19 crisis.