Australian banks can absorb the increase in credit losses and disruption to funding markets due to Covid-19, without any immediate or significant risks to creditworthiness, S&P Global Ratings said yesterday.
That looks like positive news to me. So right now, I'll take it.
Coming off the back of the Government support package and Reserve Bank's rate cuts, it offers a reminder that three crucial economic pillars remain strong.
Finance Minister Grant Robertson buoyed business with what Westpac chief economist Dominick Stephens described as a "suitably aggressive" initial support package.
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More than $12 billion in fiscal support — 4 per cent of GDP — and, in Robertson's words, "only the beginning".
That fiscal response "dovetails the RBNZ's" said ANZ chief economist Sharon Zollner.
"The Government and the RBNZ have stepped up to the plate to help and are both expected to do more – that's encouraging."
Both Robertson and Reserve Bank Governor Adrian Orr have alluded to the vital role commercial banks will play in seeing the economy through these troubled times.
Orr — who is talking regularly to local bank bosses — reassured that they were in good shape and ready to play their part.
Robertson noted the Government was now "working in partnership with the banks to understand the impact of Covid-19 on access to working capital for businesses".
"We recognise that it is in the interests of businesses, banks and the Government to work together to support firms through this situation," he said.
This is heartening stuff.
The big commercial banks have spent years reminding us that their financial strength is of great value to society. Now is the time for them to prove that.
Their capacity to work with distressed businesses will be key to minimising the fallout from this crisis.
The S&P Global report doesn't sugar coat the risks.
"We estimate that Covid-19 will contribute to the Australian banks' credit losses nearly doubling in 2020 ... from historic lows in 2019."
But it provides some much needed reassurance: "we believe that Australian banks retain headroom in their earnings to absorb a rise in credit losses even beyond our revised forecasts, without posing significant risks to their creditworthiness."
S&P bank analyst Sharad Jain said much the same situation would apply to the New Zealand subsidiaries. Nor does S&P have any bank-specific concerns.
While S&P hasn't looked at New Zealand's smaller banks, the next largest, Kiwibank is owned by government-owned shareholders and there's no reason to believe any of them are at any immediate risk, he said.
Ultimately the strength of the Australian banking system will determine the strength of ours.
In the GFC it took government deposit guarantees — on both sides of the Tasman — to maintain confidence in the financial sector.
Thankfully, with other sectors like aviation needing more attention, there are no signs that this kind of action is yet needed.
Borrowing will become tougher.
"While the package itself is impressive, there is no way to hide the fact that funding is a big ask," Zollner said. "Bond spreads have widened, but we see QE in due course, which will ease that pressure.
"Additionally, the RBNZ's delay to the bank capital increase will support credit provision, given the role banks will play naturally through the provision of credit."
Meanwhile, New Zealand's previously robust, fiscal position will be significantly impacted.
Net debt will increase beyond the self-imposed 15-25 per cent target range, not just by the 4 per cent of GDP spending boost.
"Revenues will be lower and automatic stabilisers will kick in — all of this will inflate net debt further."
The Government would just have to look through that, she said.
New Zealand can be thankful that successive finance ministers across several governments have managed the nation's money cautiously, pushing back against calls for greater spending on the basis that we needed a buffer for some unforeseen external shock.
"We go into this with net core Crown debt at 19.5 per cent. One of the lowest in the developed world," Robertson said yesterday.
"This is the rainy day we have prepared for."