The outlook for New Zealand and Australia’s banks has been revised downwards from “neutral” to “deteriorating,” according to Fitch Ratings.

A slowdown in economic activity in New Zealand and Australia is the reason for the action, reaffirming a forecast from KPMG banking expert John Kensington, who back in April said banks’ run of record profits could be nearing an end. 

Fitch Ratings now forecasts economic growth this year of 0.8%, compared to a prediction of 1% made in December 2022, Stuff.co.nz reports. 

Fitch’s senior director for financial institutions, Tim Roche, stated: “The Reserve Bank of New Zealand has been more aggressive than the Reserve Bank of Australia in its tightening cycle and seems more willing to tolerate the risk of recession as it seeks to rein in inflation.

“Fitch expects the increase in unemployment in New Zealand to be larger than that in Australia this year, which suggests risks to asset quality will be greater in New Zealand.”

In terms of asset quality, this refers to an increase in loans in distress, with borrowers unable to meet their repayments.

“Nonetheless, the labour market deterioration so far has been modest relative to previous shocks,” Roche added.

The central bank’s low-deposit lending curbs would limit New Zealand bank losses on loans. 

“Macroprudential limits on loan-to-value ratios should limit bank losses, and the starting point for asset quality in New Zealand is even stronger than in Australia,” Roche stated.

Furthermore, ASX Australian share market investors have seen the value of their bank shares decline over the last year as the Australian and New Zealand economies have faced high inflation and soaring interest rates.