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Moody's says New Zealand banking system stable despite dairy sector distress

[WELLINGTON] Moody's Investors Service on Monday said the outlook for New Zealand's banking system is stable, despite weakness in the dairy sector and higher household leverage.

"Over the next 12-18 months, the banks' financial profiles will remain healthy on an absolute basis, and sound in relation to our expectations for their current ratings," said Daniel Yu, a Moody's vice-president in a statement.

According to Mr Yu, low dairy prices and rising leverage represent two key risks to the banks' operating environment.

Until recently, dairy was the backbone of New Zealand's economy, representing around 25 per cent of exports. But prices have tumbled by more than half since early 2014, hurt by China's economic slowdown and global oversupply.

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More than 85 per cent of farmers are estimated to be operating at below break-even levels.

Earlier on Monday, global dairy giant Fonterra Co-operative Group maintained its forecast payout for its farmer shareholders for the current season at NZ$4.25 (S$4.10). The forecast marks the third year of low payouts and remains below an estimated break-even level of around NZ$5.28.

Mr Yu said a key factor in New Zealand's high leverage has been the rebound in household borrowing which is supporting overall credit growth. New Zealand's official cash rate is currently at a record low 2.25 per cent, leading to a significant increase in housing loans.

While banks' asset quality is expected to weaken, in particular the dairy sector exposure, Mr Yu said any deterioration will be contained. "Housing loans - which make up the largest part of the banks' portfolios - will continue to be supported by low interest rates and stable employment conditions. In addition, the central banks' macroprudential measures will support the performance of more recent loan vintages," he added.

Last month the central bank proposed changes to existing mortgage lending rules in order to mitigate risks to financial stability arising from the current boom in house prices .

Moody's rates eight of New Zealand's 15 locally incorporated banks. These eight banks cover 89 per cent of total system loans.

Moody's has maintained a stable outlook on New Zealand's banking system since September 2010.