NZ banks' ratings cut - but it could have been worse

Photo / Sarah Ivey

The New Zealand offshoots of Australia's big four banks breathed a sigh of relief yesterday that they received just a one-notch credit rating downgrade from Standard & Poor's and not a two-notch reduction.

The downgrade from AA to AA minus was not expected to have a major impact on the banks' funding costs or on the consumers' cost of borrowing, but a two-notch downgrade would have had a far greater impact, banking experts said.

The downgrade applies to Australia's Commonwealth Bank, ANZ, National Australia Bank and Westpac and their New Zealand units ASB, ANZ National, BNZ and Westpac.

A credit rating downgrade for the banks has been on the cards since S&P announced early this year that it was revising the way it rated banks.

While local banks generally expected a one-notch downgrade, they were understood to have been concerned that S&P could have gone further.

As it turned out, the New Zealand banks were downgraded by the same extent as their Australian parents, despite S&P ascribing a higher banking risk score to New Zealand than to Australia.

The downgrades were a result of a review to S&P's bank ratings methodology, which arose when several of the agency's ratings on major international institutions were found, in some cases, to be woefully inadequate in the aftermath of the 2008 global financial crisis.

S&P rates about 750 banks around the world. Dozens have already been downgraded under S&P's new criteria, and hundreds more are likely to follow.

Many banks retained their ratings and some, such as Hong Kong's Standard Chartered, have had their ratings upgraded.

BNZ, a unit of National Australia Bank, said the ratings change would not have a big impact on its funding costs.

BNZ treasurer Tim Main said improvements had occurred since 2008 which had seen a strengthening in the bank's balance sheet.

"A higher proportion of customer deposits are now being raised and term wholesale funding has been lengthened and diversified, with a consequent reduction in short-term wholesale funding," he said.

These changes have been accelerated under the Reserve Bank of New Zealand's new liquidity policies, and in particular, under the core funding ratio that requires all banks to maintain a minimum level of stable funding to support lending assets.

Main said yesterday's move would increase the bank's funding costs by perhaps five to 10 basis points.

"The critical thing is retaining the AA threshold," he said. "If we had fallen below that then it would have had a significantly greater impact because we would have dropped off the radar in terms of the international investors, so therefore they should not be pricing us too differently," he said.

Early last month, S&P cut its Banking Industry Country Risk Assessment (BICRA) score on New Zealand to group 3 from group 2, compared with an Australian BICRA score of 2.

BICRA is scored on a scale from 1 to 10 - with the highest score being 1.

In releasing its BICRA score last month, S&P was generally complimentary about the New Zealand banking sector, but complained about its high dependence on net overseas borrowings - which fund about 42 per cent of domestic customer loans.