New Zealand’s financial system remains sound and is operating effectively. Banking system profitability has fallen modestly as a result of declining net interest margins, but remains robust. The banking system appears to be operating efficiently when compared to other OECD countries, based on metrics such as cost-to-income ratios, non-performing loans and the spread between loan and deposit rates. Banks have tightened credit conditions in response to slowing deposit growth and elevated credit risks in the property development and dairy sectors. Solvency margins have fallen in the insurance sector, but the sector remains well positioned to absorb the costs of the Kaikoura earthquake.
The outlook for the global economy has improved since the last Report, but global political and policy uncertainty remains elevated and debt burdens are high in a number of countries. A sharp reversal in risk sentiment could lead to higher funding costs for New Zealand banks and an increase in domestic borrowing costs. Rising protectionism could also affect the trade-exposed sectors of the New Zealand economy.
Against this backdrop, New Zealand’s financial system remains exposed to three key risks: housing market vulnerabilities, bank funding pressures and dairy sector indebtedness. While these risks have reduced in the past six months, they remain elevated.