This is because these organisations mainly lend money on mortgages on housing, and this market in Auckland and Christchurch is red hot. It is well known that the government is concerned about this, as is the Reserve Bank of NZ.
If something causes a major downturn in in house prices, it could take down one or more of these organisations.
Nb. S & P’s outlook on ANZ, ASB, BNZ, Westpac, Bank of India, Rabobank and Kiwibank is unchanged.
However Westpac recently pulled back on its level of mortgage lending loan-to-value ratios (LVR) after house prices in Auckland and Christchurch rose to a level Westpac wasn't "comfortable" with, although chief executive Peter Clare said it didn't look like a bubble yet.
Clare said the reduction in Westpac's LVR loans above 80% meant the bank was well positioned to respond to the Reserve Bank’s concerns.
It is impossible to predict the future, and so impossible to say which one might fail.
Indeed none may fail ? Or could they all fail ?
The banks lend 8.4 times equity
PM Capital recently commented on various issues about New Zealand’s big four banks, which are all owned by Australian parents. ( Incidentally their profits soared to near $3.5 billion for the 2011/2012 year.)
Australian banks hold up to 8.4 times gross loans to equity. The perception of home loans is that they are low risk, but the reality is if we ever had an environment where home prices were to decline 20% to 30% on a permanent basis, there would be a significant problem. The sizable amount of leverage on the balance sheet from these loans would cause the big banks serious distress.
PM capital said this highlights that people are forgetting how balance sheets work and assuming home loans will be fine forever, which is exactly what happened in 2008 in the US. We all know how that turned out !
On the plus side
The four pillars policy is an Australian Government policy to maintain the separation of the four largest banks in Australia by rejecting any merger or acquisition between the four major banks, and the ensures the big four cannot be bought out or taken over either.
It has been argued that this gave them and the Australian banking system the strength to withstand the Global Financial Crisis of 2008/2009.
However no one really knows, if it came to the crunch, whether or not they would let their NZ subsidiaries fail whilst saving their Australian operations.
I’ve been asked several times this week
Is my money safe and in NZ credit union, or a major NZ bank?
We all know now that “what can't happen” sometimes does.
Banks are only a place for short term money
Banks are only a place with short-term money really – wages, short-term savings to buy a big item, a house and so on.
But to be err on the safe side, I would not keep any large sums in any one bank. If you must have large sums in the bank, diversify across several of them , just in case.
“I never worry about action, but only inaction.” - Winston Churchill
Anyway most of us can’t afford to leave our money in a bank – we need it to earn more -- we need it invested.
Diversification& other key issues
The rules of investment are;
· Buy quality
· Diversify across bonds, property, and shares in NZ and offshore
· Average into shares progressively
· Get good advice
“Many receive advice, only the wise profit from it.” - Harper Lee
This article was supplied by Alan Clarke who is the author of a book entitled “Retire Richer” which is a practical guide for everyone age 25 to 85.
Alan also writes a regular blog on www.investandretire.co.nz
Alan is an authorised financial adviser (AFA) and his disclosure statement is available on request and free of charge.