Financial system in good shape: RBNZ
There were seven key takeaways in the Reserve Bank of New Zealand's (RBNZ) latest Financial Stability Report, which outlines the state, resilience and vulnerability of the financial system.
Risks are limited. “Currently, financial stability risks remain contained as we near the bottom of the economic cycle,” the RBNZ said. “The financial system is well positioned to continue providing credit to the economy, even if the downturn gets worse.”
The economy has weakened. Households have reduced their discretionary spending and businesses have delayed their investment plans, while “significant further weakening in the economy remains a risk”.
The property market is subdued. Economic concerns and higher interest rates have led to reduced buyer demand and “declining residential construction”, according to the RBNZ.
Debt-servicing costs are falling. “Advertised mortgage rates have fallen over the past six months. Debt-servicing costs should become more manageable over time.”
Mortgage arrears are rising. Rising unemployment is causing financial difficulties for some households. “Banks expect the non-performing share of their lending to increase, although still well below previous recessions.”
Lenders are well-capitalised. “Banks are in a strong financial position to manage loan defaults,” according to the RBNZ. “They continue to be profitable. Capital ratios are comfortably above our minimum requirements, even as those requirements increase.”
Property insurance is getting dearer. Insurance prices are likely to keep increasing, although at a decreasing rate. That said, high-risk properties may not get the same relief. “For vulnerable properties, flood-risk premiums are becoming more common as the trend towards risk-based pricing continues.”
Non-bank lenders losing market share
Meanwhile, the Financial Stability Report also provided an update on New Zealand's non-bank deposit-takers (NBDTs), which include building societies, credit unions and deposit-taking finance companies.
“The sector is very small relative to the banking sector in terms of total lending. However, the sector provides services to a relatively large number of customers. There has been a broad-based slowdown in new lending by NBDTs over the last 18 months, particularly by building societies and credit unions. Slower credit growth is driven by the high-interest rate environment, an uncertain economic outlook and increasing competition with banks for new lending,” the RBNZ said.
“Non-performing loans have increased moderately from low levels over the past year. This has led to higher provisioning for losses. The resilience of NBDTs varies across the sector. Low profitability continues to be an issue in the sector, particularly for credit unions. Some NBDTs continue to face challenges from the softening economic environment and a lack of scale.”