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NZ Will Have To Swallow Sub-Prime Medicine -- KPMG Bank Survey

Fuseworks Media
Fuseworks Media

Wellington, April 22 NZPA - New Zealanders will feel the effects of the US sub-prime mortgage crisis as banks curtail lending, accounting firm KPMG said in its annual survey of the banking industry today.

"New Zealand's major banks will react to the fallout from the American sub-prime mortgage crisis by curtailing lending, the firm's head of banking and finance, Godfrey Boyce said.

"The prevailing wisdom has been that New Zealand will largely escape the fall-out from the sub-prime mortgage crisis.

"But with more than 30 percent of balance sheets funded from offshore, New Zealand banks are experiencing the credit squeeze that has resulted from the sub-prime crisis.

"In this respect, we will be forced to take our own share of the sub-prime mortgage medicine."

Mr Boyce said bank's had already curtailed the flow from the loans tap.

If domestic conditions deteriorate and there is no improvement in offshore funding markets, New Zealand banks' ability to lend would be further constrained and credit rationing may be necessary.

"That would clearly be detrimental to the overall economy."

The global crisis that is likely to affect New Zealand comes after a sustained period of benign credit conditions and strong asset growth.

The historical figures presented in the 2007 KPMG survey showed banks continued to achieve strong growth and profitability.

The 2006-07 results for the registered banks showed an increase in total assets of 16.2 percent and an increase in net profitability of 10.1 percent.

"But he said in the wake of the sub-prime mortgage crisis, events had moved quickly and the industry is now experiencing a paradigm shift with the emphasis switching very quickly to funding and liquidity," Mr Boyce said.

The sub-prime mortgage crisis has produced a credit crunch and New Zealand banks are generally struggling to source medium to long term funding -- and when they can, it's at very much higher interest rates.

"In these circumstances, the banks are placing greater importance on attracting domestic funding. This is likely to contribute to keeping interest rates at, or close to, their current levels for some time."

Mr Boyce said there would economy would inevitably be affected because finance just won't be available as readily as it has been in recent years.

Bankers were already behaving differently to customers.

"Banks that have rolled out the welcome mat to customers are now insisting that appointments are necessary and the business case needs to be watertight."

He said lending policies were being strictly enforced and front line lending staff now had little, if any, discretion to vary terms and conditions of lending.

Banks had far less appetite for lending to new customers unless it was part of a wider banking relationship and the customer and their credit history was known and understood. Their priority was to retain existing customers.

The survey found a number of banks had already recorded increases in arrears and impaired assets, albeit from a very low base.

Credit risk management units are expected to have a busy year, Mr Boyce said.

He noted the depth of credit management capability in New Zealand banks had not been tested since the early 1990s and was something of an unknown quantity.

Institutions with relatively more experience and capability in liquidity management and financial risk management would be in a position to take advantage.

Mr Boyce said that as those on fixed mortgages went from 7 to 9 percent rates, there was likely to be an upswing in the sale of baches and boats.

Those investing in rental properties were likely to sell as they faced higher interest rates, static rents and the prospect of no capital gain.

The contraction in disposable incomes would affect small and medium businesses and these would find banks less accommodating than they had been in the last decade.

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