Moody's sees pressure on NZ banks' profitability

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Moody's Investors Service says slow credit growth, low interest rates and rising costs will weigh on the profitability of New Zealand banks in the next 12 to 18 months.

That's despite asset quality and capital remaining strong.

"We expect GDP growth to moderate as slowing growth in New Zealand's key trading partners is raising external risk, while a subdued housing market will dampen household consumption domestically," says Daniel Yu, a Moody's senior analyst.

"Profit growth will also moderate as credit growth remains slow, spurring increased price competition and as low interest rates weigh on net interest margins," Yu says in a statement.

Moody's is forecasting New Zealand's GDP will slow to 2.5 percent in both 2019 and 2020 from 2.8 percent in 2018 but remains high internationally.

The weaker housing market, coupled with slower economic growth, subdued wage increases and high levels of household debt, will also increase mortgage delinquencies but asset quality overall will remain strong, supported by low interest rates and healthy economic conditions, it says.

Deposit growth is likely to slow because of lower interest rates but weaker credit growth will mean that banks' wholesale funding requirements are unlikely to change materially in 2019 and 2020.