New Zealand-The Good News: While Global Financial Markets Have Reacted Sharply to High Levels of Uncertainty, to Date New Zealand's Economy and Financial Markets Have Weathered the Storm Well. How Has New Zealand Managed to Remain Relatively Well Insulated from the Turbulence in Global Markets and What Are the Risks Ahead? (from the Chief Executive)
Unkles, John, Journal of Banking and Financial Services
Facing a slowdown in the world economy and adverse conditions in international financial markets, New Zealand's financial institutions have been remarkably resilient over the past year. This stability in financial markets has been underpinned by the strong performance of both the New Zealand and Australian economies relative to the rest of the world.
In view of the external environment, New Zealand's economy produced an outstanding performance in 2002, growing by an annual average rate of 4.4 per cent in the year to September. At the same time, the unemployment rate has continued to decline, reaching a low of just under 5 per cent in early 2003 for the first time in almost 15 years.
The strength in the domestic economy has been very conducive to lending growth, enabling New Zealand's banks and financial institutions to maintain strong profit growth and capital adequacy. Asset quality also remains high despite some deterioration in credit quality amongst corporate clients.
Four of the five major New Zealand banks are owned by Australian parent banks, all of which had exposures to Enron and some of which lent to other failed corporates such as Ansett and Pasminco. However, with strong parent banks, healthy reserves and well-diversified portfolios, New Zealand banks have successfully negotiated these financial pressures well so far.
Indeed, on a number of growth and profitability measures, including return on average total assets, New Zealand's banks have outperformed Australian banks in recent times. The strength in the housing market, in particular, has provided considerable momentum both to economic growth and to the profitability of banks and finance companies (through robust lending growth) over the past year.
The key factors driving this expansion in the housing market have been low domestic interest rates, relatively low house prices in real terms, a shift in risk preferences towards investing in tangible assets and strong immigration.
New Zealand's rural sector has also provided a strong fillip to economic growth and has been a key source of lending growth for financial institutions, with farm incomes being fuelled through early 2002 by a low exchange rate in US dollar terms and relatively high commodity prices.
However, strong gains in the $NZ/$US exchange rate in recent months have eroded some of the effects of sharply increased world dairy prices as well as increases in a number of other commodity prices. On another cautionary note New Zealand's largest company, the diary co-operative Fonterra, announced in February a sharply reduced payout to farmers for this season, to $NZ3.60 a kilo from $NZ5.30 previously.
KPMG's latest annual banking and finance survey highlighted not only the growth in the lending and profit performance in New Zealand's finance sector, but also the increased consolidation within the industry. New and existing finance companies have undertaken aggressive competition for both liability and asset growth.
In this highly competitive environment, retail margins have faced significant compression, especially for mortgages. The survey indicated that while banks have achieved solid gains in profitability, there has been a flight of funds to the higher interest rates offered by finance companies and contributory mortgage companies. …