Are retail deposit rates in NZ about to head higher?
The mention of the words “banking regulation” is enough to send anyone off to sleep. But without a doubt it has had, and continues to have, a significant impact on financial markets since the GFC. For this reason we can’t ignore it.
Last week I realised the New Zealand subsidiaries of the Aussie major banks had fallen victim to yet another, not insignificant, ‘tweak’ to regulation which I think is worth sharing. This is because it has the potential to impact term deposit pricing, NZ dollar bond issuance, and the cost of borrowing for both consumers and corporates.
What has changed?
The major banks in New Zealand have two key regulators: the Reserve Bank of New Zealand (RBNZ) and the Australian Prudential Regulation Authority (APRA). Several years ago the RBNZ introduced a banking resolution framework (Open Bank Resolution, or OBR), the purpose of which was to ensure bank shareholders and depositors, rather than tax payers, would bear the brunt of a banking crisis.
With this in mind, and following discussions with the RBNZ, APRA has made a policy decision to adjust the financial assistance caps applying to New Zealand for all Australian banks. As a result of the change, New Zealand branch mortgages (parent entity) will need to be taken onto the New Zealand banking subsidiary’s own balance sheet, with the New Zealand arms borrowing more to repay the parent.
What does this mean?
ANZ in particular will have an additional amount to borrow from depositors or capital markets to the tune of $1.6 billion pa from 1 January 2016 until 2021, over and above what they need to fund growth (and this is also rising). This could put pressure on deposit pricing and funding costs in New Zealand, especially in light of the amount of bonds maturing in 2017 and 2018 (see chart below). Westpac will also have a larger task, but have said this is only $500 million in total.
Source: Bloomberg, AMP Capital
Is there likely to be a rating impact?
We take comfort from the fact that rating agencies haven’t responded. But arguably this highlights that investors cannot ignore regulation.
Parent support is a key factor rating agencies consider with regards to the New Zealand subsidiary bank ratings. This has been diluted somewhat, but importantly is still permitted as both hybrid capital and secured funding (such as covered bonds) are excluded from the ‘routine exposure’ cap.
If willing and able, the Australian parent bank can still therefore provide both capital and secured funding support to the New Zealand subsidiary bank in a crisis. Phew! But… it also means that non-equity funding must be secured, i.e. the parent bank must be more certain of repayment.
It’s the fact that the weight of secured funding is low in New Zealand that has saved us from a downgrade.
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