The outlook for New Zealand's banking system has improved because of the better-than-expected management of the Covid-19 pandemic, while house prices are set to fall, according to a leading credit rating agency.
S&P Global Ratings said the economy had defied predictions of a sharp recession and a slide in house prices through the management of the pandemic and this had cushioned the banking system from an anticipated credit shock.
"Given the fact that New Zealand has done an incredible job of containing Covid ... and is still continuing to do better than most developed economies of the world, we would say that is certainly a positive economic influence on the banking system," S&P's financial institutions director Lisa Barrett said.
It is now forecasting economic growth of 2.4 percent this year and about 1.5 percent between 2022 and 2024, underpinned by the strength in the housing market.
Barrett warned the price rises would not last.
"We expect house prices to unwind in an orderly manner in the coming year despite prices and transactions soaring in recent months."
"We anticipate that credit losses at New Zealand banks will remain relatively low at about 0.30 percent of gross loans and advances over the next two years."
Barrett said the banking system's reliance on overseas markets for finance left it vulnerable to periods of economic, financial or liquidity distress, such as a sudden drop in house prices.
"The New Zealand banking system's relatively low level of customer deposits and its sizeable dependence on net external borrowings remain key ratings weaknesses compared with other banking systems."
She said the other risk was the high level of mortgages held by banks, which accounted for more than 60 percent of the total loan book.
"But overall, it's still not a risky banking system in our view in New Zealand," Barrett said.
Australia's overall credit rating was higher because of a more stable housing market and more active banking regulation by the Australian Prudential Regulation Authority.