NZ banks have ample buffers against pandemic storm: analyst

They come from a strong asset-quality position and have sound capitalisation.

The regulatory measures introduced by New Zealand’s central bank provide the local banking industry ample support against the evolving coronavirus pandemic, according to Fitch Solutions. However, risks to the financial system rose with downward pressure sighted to grow in the next 12 months.

The Reserve Bank of New Zealand (RBNZ) slashed the overnight cash rate to a historic low of 0.25% from 1%, and will likely stay at this level for the next 12 months. This should reduce borrowing costs for businesses in the hardest-hit sectors, including tourism, education, and agriculture, and may help ease short-term pressure, says Fitch.

In turn, these would help alleviate banks’ asset quality pressures in the near term.

RBNZ has also deferred the implementation of the new capital framework by at least 12 months, which should provide banks with more headroom for lending and support credit availability.

New Zealand banks are also starting from a strong asset-quality position, noted Fitch. Further, capitalisation of the New Zealand banks remains sound and should provide sufficient buffers to withstand any short-term volatilities.

However, their asset quality will face increasing pressure should the pandemic persist, and the reduced demand may lead to many businesses facing cash flow problems.

Some banks are also expected to face weaker profitability and capitalisation pressures over the next 12 months, with the sustained profitability deterioration weakening banks' internal capital generation over the medium term, according to Fitch.

“We also expect the recent disruption in the wholesale markets to have a modest impact on banks' funding profile. The major banks' reliance on wholesale funding remains high, but their liquidity positions and central bank support should provide a strong offset to this risk,” the note concluded.

Along with the RBNZ rate cut, the New Zealand government announced a $6.7b (NZ$12.1b) stimulus package, or about 4% of the country's GDP, to support employment and boost business confidence. A large part of the package $2.82b (NZ$5.1b) are allotted for wage subsidies to businesses that experience significant revenue decline in H1 2020. The rest will support low-income earners, health systems, aviation and to encourage business investment.