Fitch says rising interest rates will both be credit-positive for New Zealand banks and boost their profitability

New Zealand banks have milked low interest rates for the past 17 months, increasing their mortgage loans and profits enormously, but higher interest rates are probably good for banks too.

Credit rating agency Fitch says: Expected Reserve Bank (RBNZ) Official Spot Rate Increases credit is likely to be positive for New Zealand banks, and good for their profitability.
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“We expect the RBNZ to begin raising interest rates at its meeting on Aug. 18. Higher interest rates could be positive for banks’ profitability and earnings due to higher yields on bank assets, especially loans. of net interest margins is usually seen at ultra-low interest rates,” says Fitch.

However, Fitch suggests that the positive impact on profits for banks from any rate hikes could take some time, as the vast majority of New Zealand’s home mortgages are fixed-rate.

“Banks have already started raising mortgage rates in anticipation of future rate hikes. However, more than half of banks’ mortgage customers have a fixed-rate term of more than six months,” Fitch said.

“Rate hikes could encourage banks to lend more traditionally and reduce liquid assets, although the higher cost of borrowing will also affect credit demand. We expect credit growth to remain strong in the coming year, driven largely by the issuance of Mortgage lending growth is expected to slow slightly amid higher rates and tighter mortgage regulation, due to further restrictions on the loan-to-value ratio (LVR) and potential curbing debt-to-income lending may pick up , as strong economic conditions encourage borrowing more for investment.”

“If banks are able to increase lending and yield on interest-bearing assets, the positive effect on profitability will be partly offset by higher borrowing costs. Bank demand deposits have grown significantly over the past 12 months thanks to strong liquidity support from the RBNZ and a shift from term deposits to suspense accounts.However, we expect deposit growth to slow as the RBNZ continues to taper off its monetary stimulus, prompting banks to rely more on wholesale funding, which is more expensive than on-demand deposits. level of reliance on wholesale financing will gradually return to pre-pandemic levels over the next two years,” Fitch said.

Fitch sees the risk that higher interest rates could have adverse effects on asset prices in New Zealand, especially for house prices, which have risen significantly in 2020 and the first half of 2021 as household debt is high relative to the nominal available income, namely 167% in March. and low interest rates have kept debt servicing costs manageable.

Rising interest rates could weigh on borrowers’ ability to repay loans. This, coupled with tighter restrictions on mortgages, could lead to slower growth or decline in home prices over the next two years. Robust economic outlook and the tightening labor market are factors likely to raise interest rates and should support borrowers’ service capacity and mitigate the risk of a significant deterioration in asset quality,” Fitch said.

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