(U) NEW ZEALAND - AUCKLAND BANKERS KEEP THEIR FINGERS

UNCLAS SECTION 01 OF 03 AUCKLAND 000011

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E.O. 12958: N/A
TAGS: EFIN ECON PGOV NZ
SUBJECT: (U) NEW ZEALAND - AUCKLAND BANKERS KEEP THEIR FINGERS
CROSSED

REF: 08 WELLINGTON 336

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1. (SBU) Summary. New Zealand's conservative banks have so far
weathered the local recession and global financial crisis well.
Delinquencies are up but remain manageable. Traditionally
dependent on global money markets for much of their financing,
local banks have managed to get the cash they need from their
Australian parents and local depositors. There are clouds on
the horizon, however, including fears that unemployment may yet
increase significantly and complaints from the business sector
that the banks have become too stingy. End summary.



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New Zealand's Dull Banks

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2. (SBU) New Zealand's banking sector is dominated by four
large institutions, all subsidiaries of Australian banks, which
control over 90% of the NZ banking sector's assets. Under NZ
law, the local institutions must operate as separate banks,
rather than as branches of their Australian parents. As noted
in ref A, the NZ banks are conservative institutions. The
sub-prime mortgages that poisoned the U.S. financial system do
not exist in New Zealand. Also, NZ banks rarely securitize
their own assets; they tend to carry loans on their books until
paid off. NZ bank portfolios are divided roughly evenly between
residential mortgages and commercial loans. The New Zealand
Institute recently noted that there are only thirteen large
banks worldwide that still carry a AA rating, among them are all
four parents of New Zealand's Big Four banks.



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Finding Funds in an Unfriendly Market

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3. (SBU) While not vulnerable because of sloppy lending, NZ
banks remain at risk from the crippling of global credit
markets. As of November, NZ banks sourced 40% of their funding
from offshore, but that money is harder to come by. Like the
Australian Government, the GNZ has offered to guarantee loans to
NZ banks from overseas lenders (the "wholesale guarantee").
It's not clear how useful the guarantee will be. Only one bank
has taken advantage of it to date.




4. (SBU) If the wholesale guarantee is not bringing in funds,
how are NZ's banks finding cash? Mostly they are being funded
by their Australian parent banks, within limits imposed by
Australian bank regulators. As they bump up against these
limits, the Australian parents are opening separate NZ branches
(which they can fund without restriction). They are also taking
advantage of a new Reserve Bank program that buys mortgages from
the banks. At least one is borrowing short-term on
international markets without a guarantee and at a premium. One
local banker reports that, contrary to the common assumption,
there is still private equity money available (mostly from the
U.S.). However, long-term money remains difficult to come by,
and is very expensive. Most institutions are taking only
short-term money.




5. (SBU) Banks are also battling each other for retail
deposits. The pool of retail deposits looking for a home has
grown because of the collapse of many New Zealand finance
companies, non-bank deposit-takers that went under last year
after a few high-profile failures led to a run on the sector.
Retail depositors who once chased slightly higher returns at the
finance companies are now bringing their money to the banks.
However, like the offshore funding, these retail deposits are
volatile, going into demand accounts rather than term accounts.

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Fewer Customers Looking for Loans

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6. (SBU) Bankers claim that demand for credit is falling, and
Reserve Bank figures confirm that lending is down. Lending to
households dropped dramatically in 2008 as the housing market
slumped; lending to business fell at the same time, if less
steeply. Only lending to the agriculture sector went up.
Representatives of a number of local banks have told the CG that
their institutions are only lending to current clients and are
not seeking new business.



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Unpopular Bankers

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7. (SBU) If banks are reluctant to lend, they have
justification. Delinquencies and defaults are up. ANZ, the
biggest in the New Zealand market, recently announced a 25%
dividend cut and said its provision for bad debt could double
this year. Westpac announced that delinquencies in its NZ
mortgage portfolio increased 40% in the last quarter of 2008.
An executive with one of the large banks shared figures that
show delinquencies in mortgages, personal loans, and credit
cards continued to increase significantly in January.




8. (SBU) While it is prudent for bankers to be more cautious
when the economy slows, they are starting to feel the heat from
their business clients. NZ banks remain very profitable, and
local businesses think the banks should be more generous.
Borrowers claim that what the banks describe as a declining
demand for lending is actually credit rationing. One consultant
told the CG that banks are reducing lending to even blue chip
customers. Companies complain of new covenants and other
hurdles. They further complain that cuts in the Reserve Bank's
Official Cash Rate are not being passed on to borrowers. Even
Reserve Bank Governor Bollard felt obliged to publicly warn the
bankers of the "corporate anger" they face. Bankers respond
that they need to consider loan applications more carefully in
the current market. One banker noted that long-time commercial
clients who previously were able to renew credit after providing
only cursory financial information are now being pressed for
more detailed business plans.




9. (SBU) Less lending by banks, for whatever reason, and the
evaporation of the commercial paper market have prompted a
number of companies to make public bond offerings. These are
particularly useful to big names like Fonterra and Fletcher
Building and buyers who used to be customers of the finance
companies. The sellers get a source of cash outside the banking
system, and the buyers get a return higher than that offered on
ordinary bank deposits. But the bond option is available only
to strongest firms. While the Fonterra and Fletcher offerings
were oversubscribed, troubled white goods maker Fisher and
Paykel had to pull a planned offering.



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Other Institutions

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10. (SBU) The local branches of big multinational financial
institutions have a different set of complaints. The name
recognition of Citi, HSBC, and AIG, once a source of strength
and the cornerstone of their marketing, is now a source of

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headaches. Representatives of those institutions now must
assure potential clients that, regardless of the problems at
head office, their NZ operations are doing just fine. The
operations of all three are relatively small. Neither Citi nor
HSBC have any significant retail or lending operations. Citi
does investment banking and international work. HSBC does the
same, as well as some personal banking for high-income clients.
AIG mostly sells ordinary life insurance in programs for groups
like the NZ Police. All report they are making profits.



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Comment: Looking Ahead Warily

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11. (SBU) Overall, our contacts in the financial sector
expressed confidence in the durability of the sector, and of the
wider New Zealand economy. One banker pointed out that the NZ
economy has been in recession for over a year. But the pace and
depth of that recession have both been moderate so far, and
businesses in NZ have had more time to adapt than counterparts
in economies that crashed suddenly. Also, while delinquencies
and defaults are up and credit is harder to come by, conditions
resemble a conventional downturn rather than a meltdown. One
banker noted that the problems in his bank's mortgage portfolio
are so far limited to borrowers who "stretched" - borrowers who
depended on two incomes but now have only one, foreign borrowers
whose source of income abroad has shrunk, etc. The average
family with the average house and average mortgage, this banker
said, is still paying on time.




12. (SBU) New Zealand's small size, isolation, and
unimaginative bankers - all factors considered negatives a
couple of years ago - are now seen as virtues. The banks are
well-provisioned against bad loans. Even the Reserve Bank's
worst case scenario - housing prices down 30%, unemployment up
to 9%, and interest rates up 300 basis points - "would still not
lead to delinquencies and banking sector stress on the scale
being seen in the U.S." Since that scenario was described in
November, interest rates have fallen, housing prices have gone
down only modestly, and unemployment has only edged upwards, to
4.6%. As one banker put it, "we are approaching the 2001 NZ
downturn levels, but nowhere near (yet!) the 1991 levels" (when
unemployment in NZ surpassed 10%).




13. (SBU) That "yet!" should not be overlooked. While
stressing that the current economic situation is merely poor,
rather than apocalyptic, Auckland's bankers expressed concern
about the coming months. All of our contacts wonder whether NZ
has yet to see the full impact of the global economic downturn.
The banker who compared the current situation to the relatively
mild 2001 recession cautioned that delinquency rates are
beginning to rise and expressed concern about potential for
growing unemployment. Another noted that having half of its
eggs in the mortgage basket is a potential vulnerability for
NZ's banking sector. If unemployment continues to rise,
mortgage problems could spread to ordinary homeowners, and NZ's
undiversified banks will have few other revenue streams to fall
back on.




14. (SBU) Yet another banker pointed to lending to the
agricultural sector, which continued to grow last year even as
residential and commercial lending fell. When dairy prices
skyrocketed over the past few years, the sector grew quickly,
fueled by credit. Dairy prices have since returned to normal,
and many farmers remain highly leveraged. Finally, another
banker reported that he's fielding a growing number of calls
from corporate clients looking to renew credit falling due in a
few months. They are examining their revenue projections and
finding they won't be in a position to meet the terms of their
loans. They're calling their banker now in hopes of getting
ahead of the problem before their loans fall due in a few
months. Indeed, all of our contacts agreed that the next few
months will determine whether the NZ economy remains in a
manageable recession or suffers a more serious downturn.
DESROCHER