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The banking sector

New Zealand currently has 27 registered banks, with four large Australian-owned banks (ANZ, ASB, BNZ and Westpac) responsible for 85% of bank lending. The five New Zealand-owned banks account for 9% of bank lending.

About our banking sector

Despite the New Zealand financial system being dominated by banks, our banking sector is quite small by international standards. In March 2022, banks had total assets of just over $667 billion NZD. This is around 188% of our Gross Domestic Product (GDP) and is at the lower end of the range for OECD countries.

The assets of four Australian-owned banks

The New Zealand subsidiaries of the four large Australian-owned banks (ANZ, ASB, BNZ and Westpac) have total assets of between 11% and 17% of their parent group’s total assets. These four banks all have high credit ratings by international standards.

Credit ratings of New Zealand banks

Our balance sheet

Table 1 shows a consolidated balance sheet of the banking system. Loans and advances account for around 80% of banking system assets.

Banks hold a small amount of trading securities and their holdings of derivatives are mainly used for hedging. Deposits account for over 64% of liabilities and equity.

Table 1: Consolidated balance sheet of all banks (as at March 2022)

$m %
Assets
Cash (notes and coins) 667 0.1
Deposits (with depository institutions) 57,162 8.6
Debt securities (net) 48,343 7.3
Loans and advances (net) 526,720 79.0
Derivatives in an asset position 19,659 2.9
Demand balances with central bank 45,372 6.8
Other assets -31,210 -4.7
Total assets 666,714
Liabilities and Equity
Deposits (net) 425,184 63.8
Debt securities (net) 115,936 17.4
Borrowings (net) 44,475 6.7
Derivatives in a liability position 19,786 3.0
Other liabilities 7,641 1.1
Total equity 53,692 8.1
Total liabilities and equity 666,714

For a more comprehensive balance sheet see Banks balance sheet (S10).

See banks balance sheet S10

Who banks lend to

Banks do most of the lending to the non-financial, private sector in New Zealand, whereas direct capital market funding (the issue of corporate bonds) and lending by non-bank lending institutions (NBLIs) together account for only 6% of lending to this sector (figure 2).

Figure 2: Sources of non-financial private sector borrowing (as at 30 September 2021)

The percentage of total bank lending to different sectors is:

  • about 65% to the household sector, most of which is secured against housing assets (see figure 3)
  • around 12% to the agriculture sector, with the dairy sector accounting for almost two-thirds of this
  • 23% to the business sector, around 38% of which is property related.

Figure 3: Sectoral banking system assets (as at 31 March 2022)

Source: RBNZ Bank Balance Sheet Survey (BBS).

Where banks get their money

Banks get most of their funding from non-market domestic (within New Zealand) deposits or the domestic wholesale market (figure 4).

They also get funding from overseas to supplement the small pool of domestic savings. Currently, banks source around 20% of non-equity funding overseas. Just over half of this is at maturities of less than one year. Around 27% of non-equity funding is from the wholesale market.

Figure 4: Bank non-equity funding source (locally incorporated banks)

Source: RBNZ Liquidity Survey

Our debts from overseas borrowing

New Zealand's net external liabilities are high compared to most other developed economies. This is as a result of the weak domestic savings rate (figure 5). Offshore bank funding accounts for almost two-thirds of New Zealand's net external liabilities. This makes us vulnerable to disruptions in global financial markets.

However, almost all our debt is hedged into New Zealand dollars, which partially offsets the financial risk as we can provide local currency liquidity if funding risks spike unexpectedly. Also, our reliance on short-term funding markets has gone down markedly since the global financial crisis.

Figure 5: Net international investment position (% of GDP, as at 31 December 2021)

Source: Haver Analytics

Maturities differ for assets and liabilities

Most bank funding (liabilities) is short term (figure 6) — around 83% of funds mature in less than one year and just 10% take more than two years.

Figure 6: Bank funding composition (% of total non-equity funding, locally incorporated banks)

Source: RBNZ Liquidity Survey

By comparison, bank assets have much higher (longer) maturities due to maturity transformation function of the banks. That is, their practice of borrowing money on shorter timeframes than they lend money out.

Around 63% of banks' lending is mortgages with terms of up to 30 years. However, these assets have a relatively short time to re-price. Around 11% of mortgage loans are floating, and 49% are fixed and due to be re-priced within one year (figure 7). About 23% of loans are fixed for a term greater than two years.

This mismatch between the maturity timeframes of banks' assets and liabilities creates a rollover and re-pricing risk. Rollover risk comes when debt is refinanced.

Despite banks hedging most of their interest rate risk, they remain exposed to volatility in offshore funding markets. Any increased cost of banks' funds can flow through to retail rates if funding is rolled over (refinanced) at higher prices. This risk is partly offset by the core funding ratio, which requires banks to maintain a minimum level of stable funding.

Figure 7: Time to re-price on housing loans