A lot of investors know our big four banks have a big presence in New Zealand, but most will not understand that with that dominance also comes risks, especially now with the housing boom in Auckland and the impact of the slide in global dairy prices.
Westpac (WBC) operates under its own name across the Tasman, the ANZ trades through its subsidiary, ANZ Bank of New Zealand (and is the largest bank in the country), NAB operates through the Bank of New Zealand and the Commonwealth Bank (CBA) owns the ASB. Together they control around 80% of the NZ banking market.
The banks’ NZ operations are going very well. For example, Westpac revealed an 8% rise in earnings from its NZ bank in its results announcement last week for its $3.5 billion entitlement issue.
Westpac said its Kiwi operations earned $A815 million on a 7% rise in revenue in NZ dollar terms, a rise in lending and a small rise in net interest margin in the year to September 30.
In Friday’s second Financial Stability Report of 2015 (FSR), the Reserve Bank pointed out that the banks face growing levels of risk in NZ.
“Another area to watch is the four major banks’ international exposures, especially housing and agricultural lending in New Zealand where the risks have continued to grow," the RBA said.
Its other risks in Australia included the housing boom and lending to commercial property, and to a lesser degree lending to companies in the resources sector.
"Australian-owned banks’ largest international exposure is to New Zealand, where all four major banks have sizeable banking operations. As is the case in their Australian businesses, housing lending represents a substantial share (a little under half ) of the major banks’ credit exposures in New Zealand,” the RBA said.
"The performance of their housing lending has been strong recently – the NPL ratio was 0.4 per cent in early 2015, down from a peak of 1.3 per cent in mid 2010. However, rapid housing price growth in Auckland, along with strong investor activity, has heightened the risk of a future fall in housing prices and associated bank loan losses.
"Housing lending in New Zealand is quite geographically concentrated, with about half of the stock of debt secured against properties in Auckland.
"The Reserve Bank of New Zealand recently announced further measures to curb investor housing lending at high LVRs in Auckland, but relaxed LVR restrictions a little in other regions of New Zealand,” the RBA said.
Apart from housing, the other major risk across the Tasman was the strained dairy sector which has been battered by a combination of a slide in world prices, income for farmers and rising debt, much of which is held by Australian banks.
"Specifically, the major banks’ exposures to the agriculture sector are around 13 per cent of their credit exposures in New Zealand, around two-thirds of which (roughly $30 billion) are to the dairy industry.
"Although a much smaller share of assets than housing lending, dairy exposures are riskier in terms of both their probability of default and likely losses in that event, and the risk of loss is currently higher than usual given the low level of global milk prices.
"There is also a risk that stress in the dairy sector might exacerbate the rural property price cycle,” the RBA added.
Elsewhere, the banks are expanding in Asia, but compared with the elevated risks in Australia and the situation in NZ, the risks are much lower.
"Financial market volatility in the Asian region has increased markedly over recent months in association with concerns about economic growth in China,” the RBA said in the FSR.
"At this point, the direct risk to the Australian banking system from a possible deterioration in economic and financial conditions in China appears limited.
"Exposures to China and the broader Asian region are only a small share of Australian-owned banks’ assets, and many of these are shorter-term and trade-related, factors which should lessen credit and funding risks.
"That said, operational and legal risks could be relatively high, as some operations in Asia are new or dissimilar to those in Australia.
"Any material impact on the Australian banking system from developments in Asia is more likely to be due to indirect effects, such as those stemming from a sustained period of turbulence in global funding markets and/or softer economic growth across the Asia-Pacific region,“ the RBA said.
Meanwhile Westpac shares re-listed yesterday after the institutional fund raising portion of the $3.5 billion issue was completed and finished the day up 3% at $31.34.
Other banks also rose – ANZ was up 0.7% to $28.86, and the NAB rose 0.6% to $31.93, but the CBA finished down 0.2% at $76.43.
