19 Mar 2020

Weaker cash flow will pressure banks - Fitch

9:55 am on 19 March 2020

New Zealand banks are in good shape to cope with the Covid-19 crisis and short-term volatilities, but pressures will increase the longer the pandemic continues, according to ratings agency Fitch.

Close-up of New Zealand fifty dollar banknotes

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It said the government's $12.1 billion stimulus package, the Reserve Bank's cut to the official cash rate, and the delay of the new capital rules will help the economy and support activity.

However, businesses will face weaker cash flow and that in turn will pressure banks, it said.

"This pressure will become more pronounced the longer the pandemic persists, although most New Zealand banks are starting from a strong asset-quality position," Fitch said in a report.

"Fitch expects weaker profitability and pressure on risk-weights to weigh on the capitalisation of some banks over the next 12 months, with sustained profitability deterioration weakening banks' internal capital generation over the medium term."

Earlier this week, the RBNZ said it would delay by 12 months the implementation of tough new rules requiring banks to hold more capital. This is estimated to give the banks a further $47 billion to lend to businesses and households.

"Importantly, capitalisation of the New Zealand banks remains sound and should provide sufficient buffer to withstand any short-term volatilities. We also expect the recent disruption in the wholesale markets to have a modest impact on banks' funding profile," Fitch said.

"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."

  • If you have symptoms of the coronavirus, call the NZ Covid-19 Healthline on 0800 358 5453 (+64 9 358 5453 for international SIMs)

'Recession guaranteed'

Meanwhile, one of the other big credit agencies S&P Global Ratings said a global recession is already present, and was guaranteed for the Asia Pacific region.

It said the impact on China has been far greater than expected and the strength of recovery will be less the longer the crisis goes on.

"An enormous first-quarter shock in China, shutdowns across the US and Europe, and local virus transmission guarantees a deep recession across Asia-Pacific," said Shaun Roache, the chief Asia-Pacific economist.

He said the measures taken by central banks and governments would help cushion the effects of the virus on economies but would not quickly reverse them.

An early Treasury estimate is that the New Zealand economy will shrink by 1 percent in the year to March 2021, even with the stimulus and support of the government's rescue package.

"The amplifier of the real economic shocks, which has taken an outsized role, is tightening financial conditions. This could tip an economic recession into financial stress," Roache said.

He said recovery would depend on how quickly and effectively the virus can be contained, but even if that was achieved in the next few months many firms would be in no position to resume investing quickly, households would spend less, and banks would have higher levels of bad and doubtful loans.

"The scars that may be left on balance sheets and in labour markets threaten a more drawn out U-shape recovery in Asia-Pacific," Roache said.

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