New Zealand banks could make payment on disputed tax bills without putting pressure on their credit ratings, Standard and Poor's says.
The credit rating agency has affirmed its AA/stable/A-1+ ratings on the four major Australian banks ANZ, Commonwealth Bank of Australia, National Australia Bank and Westpac.
The affirmation was made despite the recent New Zealand High Court judgement on tax liabilities in relation to some transactions of Bank of New Zealand, a wholly owned subsidiary of National Australia Bank.
ANZ-National Bank, ASB, BNZ and Westpac New Zealand also all retained their ratings.
The BNZ lost a court case in which $654 million of tax and interest is disputed.
The bank said it was likely to appeal.
Westpac faces the largest potential bill of $903 million in the structured finance transaction tax cases being fought in New Zealand, analysts say.
The hearing of its case started on June 30 in the High Court at Auckland.
Westpac said it was not appropriate to comment on the BNZ decision.
Industry observers said each case was different, in particular with respect to the issue of whether banks had binding rulings from Inland Revenue (IRD).
Australian bank analysts said the banks were treating the disputed amounts as contingent liability in their accounts and their capital should be able to withstand provisions for the cases if they went against them.
ANZ had $562 million in dispute, Commonwealth Bank of Australia, which owned ASB, had $280 million in dispute and Westpac $903 million in dispute, according to a report by UBS analysts.
S&P said there was an increased probability that the four major banks would need to make "significant payments" to the IRD in relation to the disputes.
However, the payments could be made without putting pressure on the ratings because of four factors:
• The payments would be one-off items
• Bank shareholders were likely to show forbearance for any resulting cut in earnings or dividend payments.
• The banks would likely top up their equity positions in the unlikely scenario that a resultant loss caused a significant reduction in their equity bases.
• The payments were unlikely to pose any significant liquidity challenges.
"Nevertheless, S&P considers that the increased probability of these payments reduces the buffer for further unfavourable developments in the major banks' ratings."
The battle over the disputed tax is expected to run for years.
Analysts said if the banks ended up paying, the cost would be treated as a one-time item in their accounts.
UBS said if the banks ended up fully providing for the disputed tax, the impact on their tier one capital ratios appeared to be manageable.
Westpac's liability could take 24 basis points off its 2009 tier one ratio.
BNZ chief executive Andrew Thorburn said his bank could afford to pay "out of this year's profitability".
The bank remained very strong, he said.
BNZ made a $785 million bottom-line profit in the year to September 2008, but that included a one-time gain.
The underlying profit was $657 million.
Westpac reported a $484 million annual profit in New Zealand in 2008 after impairment charges.
The profit before charges was $883 million.
The Reserve Bank of New Zealand, the regulator of banks, declined to comment on the BNZ decision.
Five New Zealand banks are disputing 22 transactions in a raft of court proceedings, of which the BNZ was the first.
One of their defences is that some of the transactions had binding rulings from IRD, which allowed interest and fees to be deductible and dividends to be exempt from tax.
The judgement from Justice John Wild said a binding ruling expressly applied only to the transaction ruled on.
IRD argued that the "tax tail wagged the commercial dog" in the transactions BNZ entered into with foreign counter parties.
