Global credit agency S&P Global Ratings says it will get tougher for New Zealand's major banks but they have the financial strength to withstand the expected worst effects of the Covid-19 pandemic.
The agency recently reaffirmed the banks' ratings but downgraded their outlook to negative, raising the risks of a credit downgrade.
It said its negative view of the economy could be temporary, but there was a one-in-three chance the downturn would be more severe and prolonged, which would pressure the banks.
"A contracting economy, rising unemployment, and weak consumer and business sentiment will affect the asset quality of banks in New Zealand, in our view," the agency said in a statement.
The agency was forecasting a significant rise in banks' credit losses, perhaps as much as 12 times historic lows, but said they should still be less than 1 percent of gross loans and advances.
It also expected house prices to fall by about 10 percent, before modest growth returning from about the middle of next year.
"In the longer term, we expect that demand for housing will not be as buoyant as in the past several years as immigration will likely remain non-existent for some time with New Zealand's border closed until further notice."
However, it also noted that government support measures and bank's moves to defer mortgage repayments would limit pressure in the housing market.
S&P analyst Lisa Barrett said the banks were well supported and their credit rating was unlikely to change even if the risks became more pressing than expected.
"We believe that the rated banks retain headroom in their earnings to absorb a rise in credit losses even beyond our expectations, without posing significant risks to their creditworthiness."
"New Zealand banks are some of the highest returning banks in the world that we look at," Barrett said, adding they were well capitalised, and the big four were well supported by their Australian-owned parents.