Home loan lending helps bank stability

New Zealand bank stability has been bolstered by the fact that house prices came off the boil smoothly over the past few years, says ratings agency Standard and Poors.

Wednesday, November 21st 2012, 6:43AM

by Susan Edmunds

It says the growth of New Zealanders’ saving levels and their declining appetite for debt are a positive thing for Kiwi banks, and the fact that prices have edges back a bit reduces banks’ vulnerability to a sharp price correction.

“House prices in New Zealand have abated in an orderly manner in the past few years – more significantly than what has been observed in Australia, where property prices remain more inflated.”

But with the housing market heating up again, supported by low interest rates, the ratings agency says a sharp fall in house prices is still a key risk for bank ratings in this country.

House prices, unemployment rates and other factors impacting on borrowers’ ability to service their home loans are some of the variables taken into account when setting bank ratings.

All of the New Zealand banks focus on relatively low-risk residential mortgage lending, which boosts their stability. Residential lending represents about 50% of the total loan portfolio of the major banks, but for locally-owned institutions, that percentage reaches 80%.

BNZ, at 47.2%, has the smallest percentage of home loans compared to its total loan book while The Co-Operative Bank had the most reliance on home loans, with 90.95% of its loans issued as mortgages.

The Reserve Bank is looking at tools to smooth out asset price booms – one of which is the introduction of loan-to-value ratio restrictions on home loans.

S&P analyst Gavin Gunning said LVR restrictions were something that the ratings agency would have to look at if they were introduced.

“From a Standard and Poors’ perspective, analysis of a bank’s credit and risk management standards is integral to our credit stability analysis.”

He said that included an analysis of the bank’s policies for loan security. S&P’s bank ratings already take into account risk management policies including LVR ratios and bank ratings factor in current and future policy in determining credit risk.

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