Eight New Zealand second-tier lenders, including Heartland Bank and Credit Union South, have been put on notice by Standard and Poor's that recent strong growth in house prices could escalate.
One of the rating agency's analysts, Nico DeLange, said other risks to New Zealand's economy included a material dependence on external borrowings and persistent current account deficits.
''In our view, this increases the risk of a deterioration in New Zealand banks' credit qualities.''
The outlook on seven other banks remained unchanged, reflecting support from their respective parents, he said.
Those banks are: ANZ New Zealand, ASB, Bank of New Zealand, Westpac NZ, Bank of India (NZ), Rabobank New Zealand, and Kiwibank.
At the same time, S&P revised the outlooks on two insurance subsidiaries to negative from stable - Marac Insurance, a subsidiary of Heartland Bank and Credit Union Insurance, a subsidiary of the New Zealand Association of Credit Unions.
Mr DeLange said S&P might lower the ratings on the eight New Zealand banks on negative outlook by one to two notches within two years if economic vulnerabilities worsened.
''We consider that this risk is heightened by New Zealand's material dependence on external borrowings and persistent current account deficits, in the backdrop of an uncertain short-to-medium term outlook for the global economic recovery.''
S&P warned there was an increasing risk of a sharp correction in property prices if there was a weakening in the country's macroeconomic factors. Should there be a further widening in the current account deficit, or a weakening in terms of trade, that could heighten the risk of a sharp depreciation in the currency. That could affect confidence in the housing market, particularly if accompanied by a significant rise in unemployment.
If those were to occur, the credit losses of banks could rise materially, given there was a build-up in housing prices and domestic credit over the period before the global financial crisis.
''We consider that such a scenario would have a high impact on the banking sector and financial strength of the balance sheets of New Zealand banks,'' Mr DeLange said.
Heartland Bank head of treasury Craig Stephen said the bank's business model included greater diversity and less exposure to residential property and was based on a strategy of competing in stable and less contestable niche markets.
Craigs Investment Partners broker Greg Easton said S&P said the seven New Zealand banks retaining their status had strong parent owners and access to a range of funding options. Listed companies had access to a large shareholder base from which to raise capital. While credit unions had members, lending from the credit unions was not diversified. They were not in the corporate or agribusiness market. As the large listed banks prepared for the Basel III requirements, they were looking at more efficient uses of their capital, Mr Easton said.
Stable to Negative
Co-operative Bank, Heartland Bank, TSB Bank, Credit Union Baywide, Credit Union South, First Credit Union, New Zealand Association of Credit Unions and Police and Families Credit Union. The negative outlook does not reflect deterioration in Standard and Poor's assessment of bank-specific credit factors.
