Bollard Says N.Z. Banks Should Increase Provisions
Written on May 13, 2009
New Zealand’s banks should increase provisioning against bad and doubtful debts as the worst recession in more than three decades curbs profits and drives up unemployment, the central bank said.
“There are clear signs of financial strain emerging in large parts of the business sector,” Reserve Bank Governor Alan Bollard said in his six-monthly report on the stability of the financial system released in Wellington today. “Banks should ensure they make adequate provisions and maintain capital levels sufficient to absorb unexpected losses.”
New Zealand is in its sixth quarter of recession and the jobless rate surged to a six-year high in the first quarter as a global downturn slows exports and damps business confidence. Falling profits and weak commodity prices mean some business and farm borrowers may fall behind or default on their loans, the central bank said.
“With the domestic economy expected to remain weak over the coming quarter, asset impairments will continue to rise,” Bollard said. “Exposures to the agricultural and commercial property sectors warrant particular attention.”
Impaired and past-due assets were around 1 percent of total lending in December, the central bank said. Since then, banks have indicated there has been a further sharp rise in impairments, it said.
New Zealand banks increased provisions by NZ$600 million ($360 million) in 2008. The ratio of provisions to impaired assets is historically low, “suggesting that a more pro-active approach to provisioning will be required,” the bank said faxless payday loans.
Mortgages Arrears
Arrears have increased on residential mortgages as the jobless rate rises and house prices decline. The loss rates on mortgage portfolios are not expected to rise to anything like the extent seen in the U.S. and some other countries, the central bank said.
As the economy contracts, banks have tightened lending criteria and some businesses are reporting difficulty in obtaining credit. As well, the margin between bank lending rates and borrowing costs has started to widen.
“While current economic conditions warrant caution, it is important that banks continue to lend to creditworthy households and businesses,” Bollard said. “It is important that margins are not unduly expanded.”
The Reserve Bank is monitoring the margins on some lending, such as variable-rate mortgages, he said.
About 90 percent of the nation’s bank deposits are with the local units of four Australian banks — Australia & New Zealand Banking Group Ltd., Westpac Banking Corp., National Australia Bank Ltd. and Commonwealth Bank of Australia.
Bollard didn’t comment on the outlook for interest rates in today’s report.
Filed in: money.