New Zealand's major banks are expected to absorb the hit from Covid-19 but risks remain on the downside to banks across the Asia-Pacific region depending on how long the pandemic runs for and when a vaccine is found.
An S&P Global report on the top 60 banks in the Asia-Pacific region found most banks would cope with fallout from Covid-19 and start to recover by the end of 2021.
But a more severe or prolonged hit to the economies than expected would "almost certainly" push banks' credit losses higher, drive earnings lower and amplify other risks.
• Covid 19 coronavirus: Some banks increasing branch opening hours under alert level 3
• Banks made $7.5b in new loans during lockdown
• Mortgage wars: Banks cut rates below 3 per cent but first home buyer caution urged
• Mortgage lending recovers, banks remain ultra-cautious
"We expect that US$2.7 trillion of economic output will be lost in Asia-Pacific over 2020 and 2021, hitting the performance of banks in the region."
"S&P Global Ratings believes that the risk for Asia-Pacific banks are firmly on the downside."
S&P notes that the Asia-Pacific's economic recovery was expected to stretch to 2023 with weakening asset quality taking a "big chunk" out of bank earnings in several countries over the next two years.
"We expect most banks in the region to be able to absorb the hits from Covid-19 but we
may downgrade some lenders, particularly if economies deteriorate more severely than
we now assume."
But it said the full extent of the defaults from borrowers and banks' credit losses would not become clear until the support from governments unwound and banks ended their loan repayment moratoriums.
In New Zealand the Government's extended wage subsidy is set to end in September while a six-month home loan deferral scheme is also due to finish then, although the RBNZ is considering an extension.
Analysis of the four big banks in New Zealand by S&P found most were in a good position to cope with the fallout from Covid-19.
It said ANZ - the country's largest bank - would have sufficient earnings over the next two years to cover its increased credit losses.
"Similar to peers, ANZ NZ increased its collectively assessed provisions to $189 million for the first half of fiscal 2020 following the onset of Covid-19. This resulted in core earnings falling by about 10 per cent compared with 12 months earlier."
Banking regulator the Reserve Bank has temporarily banned banks from paying a dividend and S&P said this would help the banks' asset bases.
It expected ASB's earnings to remain resilient, albeit at lower levels than in the recent past due to a sharp rise in credit losses and the ongoing compression of lending spreads.
"ASB's net interest margin continues to tighten because of structurally lower interest rates. ASB's net interest margin declined to 2.21 per cent in the six months to December 31, 2019, from 2.28 per cent in fiscal 2019.
"Nevertheless, we consider ASB entered the crisis well capitalised, and we expect the
regulator-imposed temporary restriction on dividend payments will support ASB's absolute level of capital in the short term."
BNZ's earnings were also expected to remain sufficient to covered significantly increased credit losses over the next two years.
"Similar to peers, a predominantly Covid-19 related increase in bad-debt provisions ($151m) saw BNZ's profits decline 33 per cent in the half year to March 31, 2020, compared with the half year to March 31, 2019."
Westpac's earnings were also expected to remain resilient and sufficient to weather a sharp rise in credit losses.
"WNZL's earnings in the six months to March 31, 2020, declined by about 40 per cent compared with the previous six-month period reflecting mainly increased credit loss provisions.
"Nevertheless, we expect that WNZL, like its peers, will likely increase its absolute level of capital in the short term aided by nonpayment of dividends on common equity."
The credit rating agency is forecasting a rebound in the New Zealand economy by mid-2021 following a significant downturn due to the Covid-19 outbreak.
It expects credit losses to ease to around 50 basis points of gross loans in fiscal year 2022, down from the 80 basis points of gross loans it is predicting for 2021.