Heartland among eight banks put on rising housing risk notice by S&P

Standard & Poor's, the global credit rating agency, has put eight local banks on notice over the rising risk of a housing bubble bursting in New Zealand.

Smaller lenders Cooperative Bank, Heartland Bank, TSB Bank, Credit Union Baywide, Credit Union South, First Credit Union, New Zealand Association of Credit Unions, and Police and Families Credit Union have had their outlooks dropped to negative from stable, giving them a one-in-three chance of being downgraded in the next two years if the country's economy deteriorates, S&P says in a statement.

The outlook for bigger lenders, including ANZ Bank New Zealand, ASB Bank, Bank of New Zealand, Westpac New Zealand, Bank of India (New Zealand), Rabobank New Zealand and Kiwibank, was left unchanged due to expected support from their parent companies.

The rating agency says persistent current account deficits and a heating property market are threats to the New Zealand economy.

The current account deficit is forecast to keep widening to 6.5 percent of gross domestic product by 2017 as trade surplus from exported goods falls in the wake of the drought and the deficit from imported services remains elevated.

"We consider that there is an increasing risk that a sharp correction in property prices could occur if there is a weakening in the country's macroeconomic factors," S&P says.

If those threats materialise, "banks' credit losses could rise materially, given that there was a build-up in housing prices and domestic credit over the period preceding the global financial crisis", it says.

"We consider that such a scenario would have a high impact on the banking sector and the financial strength of the balance sheets of New Zealand banks."

An $18 billion residential rebuild in Canterbury is seen as the backbone for New Zealand's economic growth over the coming four years and Treasury ramped up its forecast housing inflation, which is seen peaking at a 7.1 percent annual pace this year and the next.

The bubbling property market is seen as a threat to the country's financial stability, with the International Monetary Fund yesterday saying local housing is about 25 percent over-valued and the Reserve Bank last week threatening to introduce restrictions on low-equity loans if they pose a "significant risk" to the system.

S&P says some of the Reserve Bank's planned initiatives to managing banking sector risks could mitigate the country's vulnerabilities.

(BusinessDesk)