VZCZCXRO3264
PP RUEHCHI RUEHFK RUEHHM RUEHKSO RUEHNAG RUEHPB RUEHRN
DE RUEHNZ #0011/01 0772224
ZNR UUUUU ZZH
P R 182224Z MAR 09
FM AMCONSUL AUCKLAND
TO RUEHC/SECSTATE WASHDC PRIORITY 0566
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEHSS/OECD POSTS COLLECTIVE
RUEHZU/ASIAN PACIFIC ECONOMIC COOPERATION COLLECTIVE
RUEHNZ/AMCONSUL AUCKLAND 0794

UNCLAS SECTION 01 OF 03 AUCKLAND 000011 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PGOV NZ
SUBJECT: (U) NEW ZEALAND - AUCKLAND BANKERS KEEP THEIR FINGERS 
CROSSED 
 
REF: 08 WELLINGTON 336 
 
AUCKLAND 00000011  001.2 OF 003 
 
 
This message is sensitive but unclassified.  Please protect 
accordingly. 
 
 
 
¶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. 
 
 
 
------------------------ 
 
New Zealand's Dull Banks 
 
------------------------ 
 
 
 
¶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 
 
------------------------------------- 
 
 
 
¶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. 
 
AUCKLAND 00000011  002.2 OF 003 
 
 
 
 
 
--------------------------------- 
 
Fewer Customers Looking for Loans 
 
--------------------------------- 
 
 
 
¶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 
 
----------------- 
 
 
 
¶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 
 
------------------ 
 
 
 
¶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 
 
AUCKLAND 00000011  003.2 OF 003 
 
 
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. 
 
 
 
----------------------------- 
 
Comment: Looking Ahead Warily 
 
----------------------------- 
 
 
 
¶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