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Fitch: New Macro-Prudential Rules Credit Positive for NZ Banks
May 14, 2015 / 2:32 AM / 3 years ago

Fitch: New Macro-Prudential Rules Credit Positive for NZ Banks

(The following statement was released by the rating agency) SYDNEY/SINGAPORE, May 13 (Fitch) Proposed new macro-prudential rules on residential property investment loans are a credit positive for New Zealand banks, says Fitch Ratings. The Reserve Bank of New Zealand (RBNZ) proposals, published in its latest Financial Stability Report on 13 May, include tighter loan-to-value (LTV) restrictions and higher capital requirements on investor mortgages. The combination of these measures should help to provide greater protection for banks against major losses in the event of a sharp house-price correction and/or rapid rise in unemployment or interest rates. The proposals target residential property investors directly, particularly in Auckland. Fitch has highlighted highly leveraged households and sustained rapid price growth in Auckland's housing market as a potential source of risk for banks. House-price growth has continued at over 10% per annum despite the introduction of LTV limits to mortgage lending in October 2013. The average house price/income ratio has increased considerably, and contributed to the indebtedness of New Zealand households which is already high relative to its peers. New Zealand's household debt as a percentage of disposable income had risen to 160% by end-2014 from 152% at end-2012, which is likely to place borrowers under severe stress should rates rise sharply or the labour market weaken significantly. In such a scenario, banks' asset quality could deteriorate significantly, hurting profitability and capitalisation. The RBNZ's proposed revisions include tightening the existing LTV regulations to address growing risks in Auckland's property market, especially for investor mortgages relative to owner-occupier loans. This would include the introduction of investor mortgages as a new asset sub-class requiring higher capital holdings, and limiting Auckland investor mortgages to a maximum LTV of 70%. The existing 10% limit on new loans with an LTV above 80% will remain in place for Auckland owner-occupiers. Fitch expects banks to offset the higher capital requirements by charging higher interest rates on investor mortgages. Outside of Auckland, the "speed limit" - the regulation restricting the amount of 80+% LTV lending a bank can underwrite - will be increased to 15% from 10%. This may stimulate other housing sectors within the country which have been sluggish. The RBNZ's proposed macro-prudential tools differ substantially from the approach taken by the Australian Prudential Regulatory Authority (APRA), which has also raised concerns about strong growth in investor mortgage portfolios of Australian authorised deposit-taking institutions. APRA has not opted for system-wide macro-prudential tools, instead seeking to manage these risks on a bank-by-bank basis. However, recent interest-rate cuts may trigger further house-price appreciation in certain pockets of the Australian property market, which may necessitate a more macro response if accompanied by strong mortgage growth. Both approaches - from the RBNZ and APRA - are likely to reduce risk within bank mortgage portfolios. However, it is unclear which will be more effective in limiting potential losses from a sharp property-price correction, as neither market has experienced a significant housing downturn. Contacts: Andrew Jaehne Director Financial Institutions +61 2 8256 0343 Fitch Australia Pty Limited Level 15, 77 King Street Sydney, Australia Jack Do Associate Director Financial Institutions +61 2 8256 0355 Justin Patrie Senior Director Fitch Wire +65 6796 7232 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email:; Leni Vu, Sydney, Tel: +61 2 8256 0304, Email:; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. Applicable Criteria and Related Research: 2015 Outlook: New Zealand Banks here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S FREE WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Fitch Australia Pty Ltd holds an Australian financial services licence (AFS licence no. 337123) which authorises it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.

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