Fitch affirms NZ bank credit ratings, sees strong earnings

BUSINESSDESK: Fitch Ratings has affirmed its AA- credit rating for New Zealand’s big four banks, saying they have performed well in a weak economy and will probably continue to produce strong results this year.

The rating agency retained its AA- long-term foreign and local currency issuer default ratings for ANZ National Bank, Westpac New Zealand, Bank of New Zealand and ASB Bank, with the four lenders also on a stable outlook.

The lenders qualified for an A viability rating due to their “consistently strong operating profitability, sound asset quality and strong capitalisation” and have taken steps to limit risks associated with their high reliance on tapping offshore wholesale funding lines.

“Against a weak economic backdrop, all four banks have performed well, generating strong operating profitability, improved net interest margins and operational efficiencies,” Fitch said.

“Fitch expects the banks to continue producing strong results in FY12, with earnings gains derived largely from further asset repricing, tight cost control and reduced loan impairment.”

Last year, Standard & Poor’s and Moody’s Investors Service changed their methodology for rating banks, which led to a downgrade of the Australasian lenders.

Fitch said it expects the banks’ Australian parents will likely provide support if needed.

The four banks’ asset quality was strong by international standards, though impairments by ANZ National and Westpac were more than those of ASB and BNZ in the 2011 financial year.

“The Christchurch earthquake has not significantly impacted the banks’ asset quality and ratios should gradually improve in 2012 in conjunction with Fitch’s expectation of a mild economic recovery,” it said.

The rating agency flagged the threat of a sovereign debt crisis in the Euro-zone as the biggest threat to the New Zealand banks, which “could trigger further market volatility and lower economic growth” if it deteriorates.

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"Last year, Standard & Poor’s and Moody’s Investors Service changed their methodology for rating banks, which led to a downgrade of the Australasian lenders."

Excerpt from the OPENING STATEMENT OF SENATOR LEVIN FRIDAY, APRIL 23, 2010
WALL STREET AND THE FINANCIAL CRISIS:THE ROLE OF CREDIT RATING AGENCIES

"Those toxic mortgages were scooped up by Wall Street firms that bottled them in complex financial instruments and turned to thecredit rating agencies to get a label declaring them to be safe, low risk,
investment-grade securities. Today, we are focusing on the role played by the credit rating agencies.

For a hundred years, Main Street investors trusted U.S. credit rating agencies to guide them toward safe investments. Even sophisticated investors, like pension funds, municipalities, insurance companies, and university endowments, have relied on credit ratings to protect them from Wall Street excesses and distinguish between
safe and risky investments.But now that trust has been broken. We have used as case historiesthe two biggest credit rating agencies in the United States,
Moody’s and Standard & Poor’s, and the ratings they gave to the key financial instruments that fueled the financial crisis—residential mortgage backed securities (RMBSs), and collateralized debt obligations (CDOs). The Subcommittee investigation found that those credit rating agencies allowed Wall Street to impact their analysis, their independence, and their reputation for reliability.

And they did it for the money.

From 2002 to 2007, the three
top credit rating agencies doubled their revenues,( i.e. Moody's, Standards & Poors and of course Fitch), from less than $3
billion to over $6 billion per year.Most of this increase came fromrating complex financial instruments. According to Standard & Poor’s, between 2000 and 2006, investment banks underwrote nearly
$2 trillion in mortgage-backed securities, $435 billion or 36 percent of which were backed by subprime mortgages. All of those securities needed ratings. Moody’s and S&P each rated about 10,000 RMBS securities over the course of 2006 and 2007. Credit rating executives got paid Wall Street-sized salaries.

At the same time, the credit rating agencies were operating with an inherent conflict of interest, because the revenues they pocketed came from the companies whose securities they rated. It is like one of the parties in court paying the judge’s salary or one of the teams in a competition paying the salary of the referee. The credit rating agencies assured Congress and the investing public that they could‘‘manage’’ that conflict and that their ratings were independent and rigorous. But the documents tell a different story.

A variety of U.S. laws and regulations rely on credit ratings togauge risk. For example, the amount of risk-based capital that a
bank must hold is determined in part by the credit ratings of itsinvestments. Some investors, like pension funds, are barred from holding below-investment-grade assets. Because so many statutes
and regulations reference ratings, issuers of securities and other financial instruments work hard to obtain favorable credit ratings to ensure more investors can buy their products.

Over the last 10 years, Wall Street has engineered ever morecomplex financial instruments for sale to investors. Because these so-called structured finance products are so hard to understand, investors often place heavy reliance on credit ratings to determine whether they can or should buy them.

Residential mortgage-backed securities (RMBSs), are one of theoldest types of structured finance. To create these securities,issuers bundle up large numbers of home mortgages into a pool,figure out the total revenue coming into the pool from all the mortgages ,and then design a ‘‘waterfall’’ that assigns portions of the total incoming revenue to what are called ‘‘tranches.’’ Tranches are not collections of mortgages; they are simply recipients of income from the waterfall of mortgage payments coming into the pool.

Each tranche is used to issue a mortgaged-backed security thatreceives a credit rating and is then sold to investors. The tranches that are first in line to receive revenues represent the safest investments in the pool and are designed to get AAA ratings. Tranches lower down the line get their revenues only after the more senior
tranches are paid, and their securities get lower credit ratings.

Wall Street did not stop there. They collected securities fromRMBS transactions, put those into a pool, and resecuritized them into what are called collateralized debt obligations (CDOs). A CDOmight contain, for example, BBB-rated securities from 100 different residential mortgage pools. CDOs often also contain other types of assets, such as corporate bonds or credit default swaps. Wall Streetfirms also created so-called synthetic CDOs which did not contain actual assets but simply referenced them. Like RMBS mortgage pools, CDOs were sliced and diced into tranches and the resulting tranches used to create securities. The securities were rated—some AAA—and then sold to investors.

In exchange for large fees, Wall Street firms helped design theRMBS and CDO securities, worked with the credit rating agenciesto obtain favorable ratings, and then sold the securities. Withoutcredit ratings, Wall Street would have had a much harder time selling those products because each investor would have had to rely on themselves to figure them out. Credit ratings helped make thesales possible by labeling certain investments as safe, using their trademark AAA ratings.

Wall Street firms also used financial engineering to combine AAA ratings—normally reserved for ultra-safe investments—with riskier securities, such as RMBS securities backed by high-risk
mortgages.Because the underlying mortgages were high risk, those RMBS securities paid out a higher rate of return than safer loans.When those higher-paying securities also got AAA ratings, investors
snapped them up.

For a while, everyone made money: banks and mortgage brokers got rich selling high risk loans, Wall Street investment banks
earned big fees creating and selling mortgage-based securities, and investors profited from the higher returns.But those AAA ratings created a false sense of security. High risk RMBS and CDOs turned out not to be safe investments.

...Looking back, if any single event can be identified as the immediatetrigger of the 2008 financial crisis, my vote would be for the mass downgrades starting in July 2007, when the credit rating agencies realized that their AAA ratings would not hold, and finally stopped labeling toxic mortgages as safe investments."

I am on page 21 of 1221 pages of the Hearing of the PERMANENT SUBCOMMITTEE ON INVESTIGATIONS into the Financial Crisis ...So may exhibits and e-mails and there is even testimony given by RICHARD MICHALEK, former vice-president and senior credit officer, STRUCTURED DERIVATIVE PRODUCTS GROUP, MOODY’S INVESTORS SERVICES.

"Immediately prior to joining Moody’s, I was a securitization consultant
advising the New Zealand law firm of Chapman Tripp, andprior to that I was an associate lawyer in the New York office of
the law firm Skadden Arps. I am admitted to practice law in New York State and was admitted to the bar as a solicitor in Wellington, New Zealand. I have a JD/MBA from Columbia University Law School and Columbia University Graduate School of Business."...Reading his testimony the bankers didn't like him and kept asking that he be taken off their deals...He was and he was put on rotation...He gives me the impression he wasn't a Dirty Game Player.

I do apologise for the rather long comment...as far as these 3 Credit Agencies go, in my opinion..their RATINGS are not worth the paper they're written on...It was them that that aided and abetted and it was all to do with Market Share...and money...they conspired with these financial institutions....hence the toxic bubble burst.

John Key and Bill English can rely on these humbug credit agencies to boost their egos...Empty promises thats all they'll get...unless ?? I might get sued lol

Cheers

.

.

Reply
Share

"Last year, Standard & Poor’s and Moody’s Investors Service changed their methodology for rating banks, which led to a downgrade of the Australasian lenders."

Excerpt from the OPENING STATEMENT OF SENATOR LEVIN FRIDAY, APRIL 23, 2010
WALL STREET AND THE FINANCIAL CRISIS:THE ROLE OF CREDIT RATING AGENCIES

"Those toxic mortgages were scooped up by Wall Street firms that bottled them in complex financial instruments and turned to thecredit rating agencies to get a label declaring them to be safe, low risk,
investment-grade securities. Today, we are focusing on the role played by the credit rating agencies.

For a hundred years, Main Street investors trusted U.S. credit rating agencies to guide them toward safe investments. Even sophisticated investors, like pension funds, municipalities, insurance companies, and university endowments, have relied on credit ratings to protect them from Wall Street excesses and distinguish between
safe and risky investments.But now that trust has been broken. We have used as case historiesthe two biggest credit rating agencies in the United States,
Moody’s and Standard & Poor’s, and the ratings they gave to the key financial instruments that fueled the financial crisis—residential mortgage backed securities (RMBSs), and collateralized debt obligations (CDOs). The Subcommittee investigation found that those credit rating agencies allowed Wall Street to impact their analysis, their independence, and their reputation for reliability.

And they did it for the money.

From 2002 to 2007, the three
top credit rating agencies doubled their revenues,( i.e. Moody's, Standards & Poors and of course Fitch), from less than $3
billion to over $6 billion per year.Most of this increase came fromrating complex financial instruments. According to Standard & Poor’s, between 2000 and 2006, investment banks underwrote nearly
$2 trillion in mortgage-backed securities, $435 billion or 36 percent of which were backed by subprime mortgages. All of those securities needed ratings. Moody’s and S&P each rated about 10,000 RMBS securities over the course of 2006 and 2007. Credit rating executives got paid Wall Street-sized salaries.

At the same time, the credit rating agencies were operating with an inherent conflict of interest, because the revenues they pocketed came from the companies whose securities they rated. It is like one of the parties in court paying the judge’s salary or one of the teams in a competition paying the salary of the referee. The credit rating agencies assured Congress and the investing public that they could‘‘manage’’ that conflict and that their ratings were independent and rigorous. But the documents tell a different story.

A variety of U.S. laws and regulations rely on credit ratings togauge risk. For example, the amount of risk-based capital that a
bank must hold is determined in part by the credit ratings of itsinvestments. Some investors, like pension funds, are barred from holding below-investment-grade assets. Because so many statutes
and regulations reference ratings, issuers of securities and other financial instruments work hard to obtain favorable credit ratings to ensure more investors can buy their products.

Over the last 10 years, Wall Street has engineered ever morecomplex financial instruments for sale to investors. Because these so-called structured finance products are so hard to understand, investors often place heavy reliance on credit ratings to determine whether they can or should buy them.

Residential mortgage-backed securities (RMBSs), are one of theoldest types of structured finance. To create these securities,issuers bundle up large numbers of home mortgages into a pool,figure out the total revenue coming into the pool from all the mortgages ,and then design a ‘‘waterfall’’ that assigns portions of the total incoming revenue to what are called ‘‘tranches.’’ Tranches are not collections of mortgages; they are simply recipients of income from the waterfall of mortgage payments coming into the pool.

Each tranche is used to issue a mortgaged-backed security thatreceives a credit rating and is then sold to investors. The tranches that are first in line to receive revenues represent the safest investments in the pool and are designed to get AAA ratings. Tranches lower down the line get their revenues only after the more senior
tranches are paid, and their securities get lower credit ratings.

Wall Street did not stop there. They collected securities fromRMBS transactions, put those into a pool, and resecuritized them into what are called collateralized debt obligations (CDOs). A CDOmight contain, for example, BBB-rated securities from 100 different residential mortgage pools. CDOs often also contain other types of assets, such as corporate bonds or credit default swaps. Wall Streetfirms also created so-called synthetic CDOs which did not contain actual assets but simply referenced them. Like RMBS mortgage pools, CDOs were sliced and diced into tranches and the resulting tranches used to create securities. The securities were rated—some AAA—and then sold to investors.

In exchange for large fees, Wall Street firms helped design theRMBS and CDO securities, worked with the credit rating agenciesto obtain favorable ratings, and then sold the securities. Withoutcredit ratings, Wall Street would have had a much harder time selling those products because each investor would have had to rely on themselves to figure them out. Credit ratings helped make thesales possible by labeling certain investments as safe, using their trademark AAA ratings.

Wall Street firms also used financial engineering to combine AAA ratings—normally reserved for ultra-safe investments—with riskier securities, such as RMBS securities backed by high-risk
mortgages.Because the underlying mortgages were high risk, those RMBS securities paid out a higher rate of return than safer loans.When those higher-paying securities also got AAA ratings, investors
snapped them up.

For a while, everyone made money: banks and mortgage brokers got rich selling high risk loans, Wall Street investment banks
earned big fees creating and selling mortgage-based securities, and investors profited from the higher returns.But those AAA ratings created a false sense of security. High risk RMBS and CDOs turned out not to be safe investments.

...Looking back, if any single event can be identified as the immediatetrigger of the 2008 financial crisis, my vote would be for the mass downgrades starting in July 2007, when the credit rating agencies realized that their AAA ratings would not hold, and finally stopped labeling toxic mortgages as safe investments."

I am on page 21 of 1221 pages of the Hearing of the PERMANENT SUBCOMMITTEE ON INVESTIGATIONS into the Financial Crisis ...So may exhibits and e-mails and there is even testimony given by RICHARD MICHALEK, former vice-president and senior credit officer, STRUCTURED DERIVATIVE PRODUCTS GROUP, MOODY’S INVESTORS SERVICES.

"Immediately prior to joining Moody’s, I was a securitization consultant
advising the New Zealand law firm of Chapman Tripp, andprior to that I was an associate lawyer in the New York office of
the law firm Skadden Arps. I am admitted to practice law in New York State and was admitted to the bar as a solicitor in Wellington, New Zealand. I have a JD/MBA from Columbia University Law School and Columbia University Graduate School of Business."...Reading his testimony the bankers didn't like him and kept asking that he be taken off their deals...He was and he was put on rotation...He gives me the impression he wasn't a Dirty Game Player.

I do apologise for the rather long comment...as far as these 3 Credit Agencies go, in my opinion..their RATINGS are not worth the paper they're written on...It was them that that aided and abetted and it was all to do with Market Share...and money...they conspired with these financial institutions....hence the toxic bubble burst.

John Key and Bill English can rely on these humbug credit agencies to boost their egos...Empty promises thats all they'll get...unless ?? I might get sued lol

Cheers

.

.

Reply
Share

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