Moody's Investors Service says the outlook for the New Zealand banking system is stable, reflecting the country's steady recovery from a mild recession and improved GDP growth.
The outlook is Moody's view on the likely direction of fundamental credit conditions in the sector during the next 12 to 18 months.
It was supported by the fact that the four major banks had solidified their market positions and improved their risk-adjusted profitability, which had helped capital generation, Moody's said today.
"We expect the fundamental credit conditions for the New Zealand banking sector to stabilise as economic indicators improve, which, in turn, will usher in the return of consumer and business confidence," Marina Ip, a Moody's assistant vice president and analyst, said.
Ms Ip is the author of Moody's latest annual industry outlook on the New Zealand banking system, in which Moody's rates ANZ National Bank, ASB Bank, Bank of New Zealand and Westpac New Zealand.
The New Zealand banking sector had an average banking financial strength rating of C+ with a mostly stable outlook.
That represented the capacity of the four major banks' entrenched positions, with a combined market share above 90 percent, to withstand further price competition, rising funding costs, or a further downward turn in the credit cycle, Ms Ip said.
As an indication of the stable outlook, the report notes that non-performing loans -- as a percentage of gross loans and defined as non-accrual loans that are more than 90 days past due -- continue to improve, most visibly in the business/corporate segment.
A recovery in dairy prices this year should ease farm cash flow pressures, leading to a greater portion of performing rural loans, Ms Ip said.
With improved economic forecasts, asset impairment levels should also improve, but Moody's would watch for signs of new exposures becoming delinquent.
"At the same time, borrower concentrations still exist, particularly in the property sector, where developments have slowed and final completions or settlements have been delayed owing to factors such as a drop in market values," she said.
"Rural lending has also become a problem sector for banks in recent years because of farm conversions and overleveraging during the boom years."
The major banks remained vulnerable to funding disruptions, given that wholesale funding accounted for around 40 percent of total funding.
While the government guarantee for wholesale funding had closed for new issuances after April 30, the banks had been able to access non-government guaranteed markets during the financial crisis, albeit at reduced volumes as lending growth was intentionally slowed, Ms Ip said.