New Zealand's banking sector, like Australia's, is still too reliant on foreign funding, says ratings agency Standard & Poor's.

S&P said in a report yesterday on the New Zealand banking sector that the system had "material reliance" on overseas wholesale funding, although the position had progressively improved since 2009 on the back of increased retail deposits.

"Although the banks are maintaining good levels of liquidity, any prolonged disruption in offshore wholesale borrowing markets is likely to escalate funding pressure on the banks and put pressure on them meeting minimum core funding ratio requirements, with the minimum set to increase to 75 per cent [from 70 per cent] on January 1, 2013," S&P analyst Peter Sikora said in the report.

The Reserve Bank's core funding ratio was designed to reduce the banks' reliance on short-term overseas borrowing.


The ratio stipulates that banks must secure at least 75 per centof their funding from eitherretail deposits or wholesale sources - such as bonds - with durations of at least a year.

The favourable funding market conditions that prevailed in 2012 helped New Zealand banks to build comfortable buffers above the minimum core funding ratio requirements, Sikora said.

Elsewhere in the report, Sikora said that the current year could turn out to be more challenging than 2011-12, with low credit growth expected to limit profit growth in the medium term.

Competition was expected to escalate as banks competed for a smaller pool of available business.

"When combined with anticipated ongoing funding cost pressure, we expect this to have a constraining effect on overall profitability," Sikora said.

On a positive note, he said house prices in New Zealand had abated in an orderly manner in the past few years - more significantly than what had been observed in Australia, where property prices had remained "more inflated".

New Zealand's financial system is dominated by four Australian-owned major banks, which account for about 91 per cent of total assets of all the incorporated banks.