Banks rely on Aussie generosity

The Australian government is propping up New Zealand's big banks' credit ratings but our own government isn't quite so supportive, according to Standard & Poor's.

Wednesday, March 21st 2012, 6:00AM

by Niko Kloeten

At a briefing in Auckland yesterday the ratings agency explained its recent changes to its rating methodology, and described how the changes have affected its ratings of New Zealand's deposit taking institutions.

S&P determines its ratings by looking at three factors: 'macro' factors (each company's rating starts from the 'anchor' rating of its home country); company specific factors such as capital and earnings, risk position and liquidity; and finally, 'external support'.

For this category, S&P looks at both 'government support' (for institutions that have 'systemic importance') and 'group support' (for companies that are owned by a larger group), and picks which one has the bigger positive effect on the company's credit rating.

Government support gives each of the big four Australian banks a two-notch boost to their credit ratings. This flows through to their New Zealand subsidiaries, which all benefit from group support to the tune of three notches.

S&P analytical manager Peter Sikora said Australia's government is rated "highly supportive" of its banks, while New Zealand's government is rated "supportive" of this country's banking sector.

However, he said that could be revised down if New Zealand's programme of Open Bank Resolution (OBR), designed to avoid the need for government bailouts of banks, goes ahead.

"It's fair to say that with the New Zealand government's progression of the OBR scheme there's some risk it could affect our assessment of the New Zealand government's willingness to support the banking sector," Sikora said.

"However, it's a little bit of a theoretical debate, given the end result was driven by the group support piece."

Sikora also said the changes to S&P's ratings methodology had less effect than expected on the Australian and New Zealand banking sector.

Only 9% of deposit-takers in Australia and New Zealand had their ratings change by more than one notch, well below the 15% forecast by S&P.

While the big banks were revised down one notch each, he noted Heartland Building Society actually improved from negative to stable outlook as a result of S&P's new way of calculating ratings.

Niko Kloeten can be contacted at niko@goodreturns.co.nz

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