Interest.co.nz spoke to Kiwibank CEO Steve Jurkovich about mortgage repayment deferrals, a slower property market, taxpayer-underwritten business loans, the Reserve Bank banning bank dividend payments, the prospect of bank CEO pay cuts, and the Reserve Bank's efforts to support bank liquidity.
Check out the video recorded on Thursday afternoon.
Kiwibank CEO Steve Jurkovich says banks are being “open-minded” when considering taxpayer-underwritten business loan applications.
“We will be more liberal, because what’s normal in this circumstance?” he told interest.co.nz, recognising the fact some businesses that are shut now, could be back up and running as usual after lock-down.
“Human needs don’t really change,” Jurkovich said.
However, he recognised the complexities weighing up which businesses are truly “viable” in the current environment.
“It’s going to take weeks sometimes to make these decisions, so I know that will be frustrating for customers, but that would be a very very long queue at a government department [if it was handling applications].”
The Government, under its Business Finance Guarantee Scheme, has agreed to underwrite 80% of eligible COVID-19-affected business loans to encourage banks to keep lending.
Asked what he makes of this arrangement whereby the government is effectively co-opting banks to help it determine which businesses will survive COVID-19, Jurkovich said that banks are best placed to make those decisions.
“We’re in the business of managing risk… we have to live up to it…
“I think the actions from the Government and Treasury and the others to get things going and make bold moves is great, but I think it’s just the start…
"Coming out of it might be more of a wicked problem than going into it in terms of a lock-down.”
Bank CEO pay cuts a 'realistic request'
Jurkovich said the Reserve Bank’s (RBNZ) move to bar locally-incorporated banks from paying dividends “until further notice” or until “the economic outlook has sufficiently recovered” is sensible.
“If we are going to have Crown support for liquidity and to support customers, then it makes sense that there would be restrictions for where that money can be paid to.”
Asked whether as long as taxpayers are backing banks, their CEOs and directors should also be taking pay cuts, Jurkovich said: “I don’t think any industry is going to be immune from that conversation.”
He was “certainly open minded” to the what he coined a “realistic request”.
However Jurkovich pointed out that banks are playing their parts.
The $6.25 billion government underwrite being provided is equivalent to 5% of new business loans written by all registered banks in a year.
He also pointed out that the government underwrite would be called up as a last resort.
“The banks will take all their usual procedures to try to realise security, and then if there’s a loss, the government will step in.”
Jurkovich acknowledged that excluding dairy, bad debts have been low over the past five years.
“It is not abnormal that banks would have to swallow more of the losses during the cycle and I think that’s what we’re facing in to. We’re all preconditioned to bad debts being down below 1%... so that is a big big change for shareholders to think about.”
A 'very high percentage' of mortgage deferral applications being approved
Turning to mortgages, Jurkovich said Kiwibank had approved a “very high percentage” of the 4000 mortgage deferral applications received by Thursday afternoon.
The RBNZ has loosened some capital rules to support banks providing six-month mortgage repayment deferrals to customers whose incomes have been affected by COVID-19.
Jurkovich recognised that with interest continuing to accrue during the six-months, deferrals weren’t suited to everyone.
Asked how concerned he was about New Zealand’s high level of mortgage debt, he said: “Overall I’d say, not that worried at the moment. But certainly a great question around how long this goes on for and how do we come out of it…
“The high LVR [loan-to-value ratio] loans certainly are more vulnerable… if you were to go through a prolonged downturn.
"Serviceability is really the key issue. [For] people earning, the LVR and the daily price of your property is probably not that relevant. If you’ve got somewhere to live and that’s the home that you want to be in… and you’re not trying to sell it, actually the price of it is not so important.
“In a forced sale situation, there are definitely some consequences.”
What will we do without rising property prices?
On a higher level, Jurkovich questioned whether we were entering an age where we would have to start thinking differently about debt.
“If you’ve been buying property on the idea that capital growth would come your way, you’ve got to wonder about that for the next few years.
“I think that does emphasise the point that actually debt reduction and serviceability and personal financial management is probably going to come to the fore much more than it did previously.
“A rising property price certainly helped a few people out. And if there’s not rising property, then I think we all need to think about actually, are we going to borrow to buy those discretionary items or are we going to try to repay some debt."
Liquidity not a problem at the moment
Jurkovich said Kiwibank is yet to really take the RBNZ up on its offer to the banking sector to provide more liquidity.
The RBNZ has launched a Term Auction Facility whereby it’s offering banks loans with three, six or 12-month terms. It'll set up a similar facility in May to provide loans with three-year terms to support bank lending under the Government's Business Finance Guarantee Scheme. It's taking government bonds, residential mortgage-backed securities, and other bonds as collateral.
“Banks have spent decades organising themselves so that if the markets dislocate or stop, then we’ve got enough money in the tin to keep trading. At the moment, there’s probably no issue in liquidity,” Jurkovich said.
“And actually, what you’re seeing is a whole lot of people moving to term deposits and savings with banks because they see the safety and security of a bank deposit versus some of the other market alternatives…
“That liquidity comes into the bank and it means that you don’t need to go into the wholesale markets, because retail customers are giving you their deposits and trusting you with that.”
Jurkovich supported the loan facilities being provided by the RBNZ, saying that come July/August, Kiwibank might take these up.
“It could be attractive and we don’t want to wait until the last minute because there’s no guarantee things get better before they get worse…
“Most banks will be thinking about it at the moment, but wouldn’t expect too much on the buyer’s side at the moment.”