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Global ratings agency Fitch Ratings has revised the outlooks for the banking sectors in Australia and New Zealand to deteriorating from neutral, amid increasing concerns about bank earnings and asset quality.
The agency said the banking sector outlooks were linked to weakening economic activity rather than bank credit.
"That said, we have modestly revised down our 2023 economic growth forecast for New Zealand, to 0.8 percent at present, from 1 percent in December 2022. Our forecast for Australia remains unchanged at 1.5 percent," it said in a report.
It also said the drivers of change in the sector outlook for New Zealand were broadly the same as Australia's.
"In Australia, we see net interest margins as having peaked late last year," it said.
"The interest rate hike cycle appears close to its end."
It expected there would be stronger competition for loans and deposits through the second half of the year, putting further pressure on interest rate margins.
"At the same time, we forecast loan growth in Australia to slow, particularly in mortgages, as higher rates deter new borrowers, and impairment charges to rise from still-low levels as arrears pick up."
However, it said there were differences in the approach of the central banks.
"The Reserve Bank of New Zealand has been more aggressive than the RBA (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 also expected unemployment in New Zealand would be larger than that in Australia this year, which suggested the risks to asset quality would be greater in New Zealand.
"Nonetheless, the labour market deterioration so far has been modest relative to previous shocks," it said.
"Moreover, 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."
In the meantime, Fitch said the outlooks on its ratings for Australian and New Zealand banks were predominantly stable.
"However, in both countries, the risk of a sharper-than-expected economic slowdown and higher unemployment remains a key threat for bank metrics, particularly if this were to push house prices lower than we project.
"The household sector is highly indebted in both countries, increasing its vulnerability to economic shocks, even if risks are mitigated by solid underwriting and households' savings buffers."
The potential for persistent inflation to force rates higher and keep them elevated longer than we project, with adverse effects on growth, was highlighted when the RBA raised its policy rate by 25 basis points on 6 June to 4.10 percent," Fitch said, adding it was above its year-end forecast of 3.85 percent.
"And the tone of the RBA's statement, as well as recent data, signals room for further rate increases."