Crikey! Falling business investment is a serious threat to term deposit savers. The last time business loan demand slumped, TD returns fell -0.5%. If that happens this time, we would be at record lows

Here's a consequence of how falling business confidence is affecting the wider community.

In July, bank lending to business fell sharply, down a very chunky -$1.731 billion or -1.6% month-on-month. It is not unusual for there to be a fall in July from June as part of a seasonal shift, but the average fall over the past three years is just -$337 million. The 2018 fall is five times as large.

In fact it is so large, it caused overall bank lending to fall by more than -$300 mln, overwhelming the small rises in lending to the rural sector (+$388 mln), and the housing and personal consumer lending sector (+$1.008 bln).

And all this comes as the amounts in bank deposit accounts pick up. They are up +0.9% month-on-month and +7.3% year-on-year. That is far faster growth than overall lending growth of +5.2%.

And that is being driven by term deposit growth, up a very impressive +1.5% month-on-month and +10.3% year-on-year, heady growth in anyone's terms.

That means bank deposits grew by a massive +$2.6 bln more than bank lending in July from June.

This is the first time since October 2011 that we have seen such a divergence between loan 'growth' and deposit growth. And back in 2011, wholesale swap rates fell a full -50 basis points over the following two months, a fall from 3.00% to 2.50%. Back then, the one year term deposit rate was 4.40%. Now, at the end of July 2018 we were at just on 2.00% for a one year swap rate, at 3.35% for a one year TD rate. If history repeats, a one year TD rate could fall to 2.85% and that would push it to an all-time low.

Essentially, declining business investment is undermining savers' returns. Term deposit offers are falling. And unless loan demand picks up, the situation will get tighter for savers. More cuts have been announced recently, more this morning with RaboDirect cutting some rates.

            month   annual  
      Jul-17 Jun-18 Jul-18 change   change  
RBNZ NZ$ bln $ bln $ bln $ bln $ bln % $ bln %
                   
S10 Total bank deposits 316.2 336.3 339.2 2.9 0.9% 23.0 7.3%
  - transaction accounts 64.8 70.0 70.4 0.4 0.6% 5.6 8.7%
  - savings accounts 85.0 84.2 85.2 1.0 1.1% 0.2 0.3%
  - term deposits 166.4 182.1 183.6 1.5 0.8% 17.2 10.3%
                   
    of which              
S40 - households 161.1 171.5 172.7 1.2 0.7% 11.6 7.2%
  - business* 155.1 164.8 166.5 1.7 1.0% 11.4 7.4%
                   
                 
C5 Total bank lending 406.6 428.3 427.9 -0.3 -0.1% 21.3 5.2%
  - housing 236.3 249.0 250.0 1.0 0.4% 13.8 5.8%
  - other personal 10.7 11.2 11.2 -0.0 -0.2% 0.5 4.5%
  - business 99.2 106.4 104.6 -1.7 -1.6% 5.4 5.4%
  rural 60.4 61.7 62.1 0.4 0.6% 1.7 2.8%

Proper comparable data is only available from the RBNZ from December 2016. But the excess of lending over deposits is now -$88.8 bln, the lowest level in a year and down from -$92 bln in June.

While some may see this as a necessary rebalancing, the consequences for savers are likely to be tough. A rebalancing because business investment slows is the hard way to do it. Rebalancing in a rising market would be the preferred way with higher savings rates pushing the correction.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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64 Comments

Questions is where to run for the saver? Ideally, the govt and the establishment would the saver to sacrifice their behavior for the nation, but where does that leave them?

One obvious alternative is KiwiSaver. Or if you don't want to lock up savings till retirement, perhaps other non-KiwiSaver Funds. The trick is to not obsess about fees; focus on after-tax, after-fee returns.

But surely, Kiwisaver is just a collection of forward bets? In an era where the forward bets have never totalled more?

Why would they stay up if business investment didn't? Or are you looking at NZ and global as separate?

And who's to say if the Provider will even still be there when its time to collect?! KiwiSaver is not Government guaranteed, as we all know. Elder Finance looked as safe as houses 10 years ago. Lucky they didn't get a Kiwsaver going as well!

KiwiSaver is not Government guaranteed, as we all know

Neither are term deposits.

Got nothing to do with the provider.... so what if they disappear, your portfolio doesn't go with them.

My Kiwisaver funds are held in trust, they are not affected if the Kiwisaver provider goes bust. I only have a problem if the whole world's stock markets suddenly go to zero. If that happens, even cash under the mattress won't be any good.

Wrong. Fees have a very detrimental impact on long term performance and are one of the few things an investor can control. NZ based brokerages are joke in terms of trading commissions and fund expense ratios. Just buy the vanguard total market etf for zero commission trading cost, and 0.04% expense ratio and call it a day.
Much better than getting bent over the barrel by Craigs or any of the other has beens,

Well at least the savings rate is higher than the lending growth for once! Term deposits don't even maintain the value of your $ after tax when you look at the real inflation in your life. My savings are going into funds until the situation improves significantly which doesn't seem likely in the short term.

Seems the economic chill in the air has a lot of Kiwi's getting nervous about less secure investments. Lots of people anticipating a crash? Personally I am wondering about getting out of NZ term deposits as NZD falls, but into what? USD? Also nice to see net overseas borrowings reducing, even if NZ's balance of payments is worsening:
https://www.stats.govt.nz/topics/balance-of-payments

You could use your cash as a deposit for a rental?

Moving into USD a few years ago might have been more lucrative, into an ETF tracking the S&P500 as an example (IVV etc).

Dirty spruiker ;) rental is just about the last investment I'd consider in NZ at the moment. With (by historical standards) high ~25 P/E of S&P500 and DJI they don't seem like a good bet especially given all the global risk factors currently present (tradewars, US midterm elections - Trump impeachment threat, emerging markets in crisis, Brexit/EU instability). Not saying that there might not still be some up-side, but seems we're nearing a global market correction of some sort - just don't know what/when the trigger will be.

What do you mean "buy a rental"? No way am I going to become an amature landlord and deal with meth head tenants. No thanks. If I wanted to buy real estate, I'd do it through a globally diversified REIT and at one-one hundredth the management fees.

DUH???

Extreme sarcasm..

Foyle,

I make no claims to being an expert,but I have been a stockmarket investor for over 40 years;in the UK and since 2004,in NZ.
Few,if any,investors have the ability to time the peaks and troughs of the market and I certainly don't try to. My focus is on sustainable dividends. Nevertheless, as the market has continued its inexorable rise,raising P/Es well above their long-term average,I have been gradually taking some money off the table and have increased my cash from around 5% to almost 15% over the past 2 years. The bulk of that has gone into short-term PIE TDs. The net interest rate is almost irrelevant,as my main concern is to have ready access to it,as and when the next market correction comes along.
Nothing is foolproof,but this strategy has served me well in the past and I believe/hope that it will see me through the next crisis. I have also put some into government stock-recognising the lack of deposit insurance- and a little into speculative holdings such as Invivo shares. I can enjoy the wine,even if the company never floats.

Seems like a big drop off in business lending. Any idea of what this will affect next? New hires? Or hardware purchases, materials?

Household deleveraging is next, but what this may signal is actually less business lending being made against housing security. Banks often tighten the purse on the little guys first when the credit tap tightens.

Old adage 'If you borrow a million dollars from the bank, you've got a problem. If you borrow a hundred million dollars from the bank, the bank has a problem' and are likely to be more flexible with you.

I wonder how much increase in the savings rate is the result of people cashing out of property investments - following the lead of the messiah Uncle John and his 'disciple' Mike Hosking... You can probably add a few million between the two of them and I see that Mike is struggling to find a rental at present so is obviously in no hurry to buy!

https://www.stuff.co.nz/life-style/homed/latest/106769212/kate-hawkesby-...

In the pre-built housing market, buyers=sellers. It's a zero-sum situation. Sellers who realise gains might put their funds into a bank deposit, but the buyers need to borrow a similar amount from a bank to complete the purchase. So that won't explain it.

When you add new builds, that would require most buyers to borrow.

So, no, it is unlikely to be from 'cashing out' - unless an unusually large number of buyers are using out-of-system cash resources to buy without mortgages (ie immigrants), but other data doesn't support that at all (first home buyers are a fast-growing segment).

The mismatch is on the business investment side, not the housing market.

Hi David

A good comment but It's all the same thing really. Housing debt represents 250 billion of all lending? Business Lending is apparently less than half that, but in reality how much of that business lending is also directly associated to the housing market, either through equity withdrawal to fund small businesses or more worryingly lending to businesses who produce the housing itself.. There have been a couple of collapses in the sector already, my guess is that within a month or so we'll hear of several other high profile collapses. That is where the housing market slowdown is hurting business lending the most - construction. The $250 billion in housing debt is no-where near the total exposure that the banks have leant into property and land debt - it's likely to be significantly over $300 billion when you factor in the associated businesses that build, land bank, develop, the brokers, mortgage companies, property managers etc etc. Like in Australia its got way out of kilter with what would be a proper allocation of bank debt within the economy. It manifests itself in a fall in 'business lending initially' which really means 'construction lending' - which is what these figures represent. After all, who would build into a property bear market if they didn't have to?

(Edit 5th August) - Around 34% of business lending is to the property sector!.... so we are actually weighted significantly beyond 60% towards housing.

Business Lending is apparently less than half that, but in reality how much of that business lending is also directly associated to the housing market, either through equity withdrawal to fund small businesses or more worryingly lending to businesses who produce the housing itself..

Right. Also, don't forget the consumption component of the economy. We cannot empirically prove that that housing bubbles boost consumer spending, but what we do know is that housing bubbles that burst decimate consumer spending. There is plenty of evidence to infer that bubbles in general are tolerated and promoted as a driver of consumer spending.

All happening at the same time as the NZ dollar depreciates against every major currency - apart from the Yuan with whom we rely on as a major recipient of our physical exports, which are becoming more expensive for that particular market.. Wouldn't want to be a Chinese investor in NZ housing assets at present, double whammy on the horizon, because I can't believe that the term depositors are all aspiring 'first time buyers' desperate to use their safe returns to buy a first home.

Very well put DC

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Wakey wakey NZ. Bank lending not just not accelerating at an ever greater clip, it SHRANK. This means economy has hit stage 2 of downturn and will accelerate down from here. Banks greater caution. AND note, less borrowing and more saving = deflating effect on consumer demand as money is withdrawn from circulation. A lot of folks with developments are going to be left high and dry i am afraid.

It's easy to see how falling business lending could be a harbinger of a much higher unemployment rate. Falling term deposit rates from banks flush with funds is just one symptom of an economy that's at the early stages of a downturn of unknown magnitude.

If it all goes south in a disorderly way, those who lose least will win most.

I look forward to stand on the same metaphorical pile of ashes declaring a Pyrrhic victory. I do however find it ironic that COL supporters such as yourself are only willing to throw voices behind spinning a positive business sentiment rather than putting your money at risk?

Ex Expat, I'll assume you were inebriated when posting this.....

You assumed wrong, Aside from champagne at celebrations I don't drink. I'm saving a nice Cuvee Sir Winston Churchill for the day the COL are kicked out. The sooner the better after the virtue signalling SJW just wasted the equivalent of 305 bottles on her joy trip to Nauru.

Speaking of the super-hip adoption of "virtue signalling" by Judith Iscariot and followers, did you catch Soimon Bridges' virtue signalling yesterday?

Simon Bridges will 'never' support compulsory Māori in schools

Judith will surely call it out on Twitter any moment now. Any time now...

Bad news for depositors but good news for borrowers as this means NZ banks are less reliant on offshore funding for on-lending to NZ borrowers. D Chaston said in June NZ banks source only 16% of their funds from offshore for NZ lending, this is now clearly reducing, hence sheltering NZ borrowers from possibly rising offshore rates

Yvil, agreed. Going forward, this has to be good news for borrowers who are fortunate to have the income to meet their obligations. Unfortunately though, in a downturn, many find themselves without overtime, jobs and are found struggling with vacant rentals.

Most of the domestic deposits are invested in terms less than 12 months. As we appear to be entering a downturn, convince me why this is a good sign when asset markets are toppy. Banks make money by lending it. If sentiment really takes a dive, funds can be shifted to perceived sanctuaries and quite quickly.

It's worth noting the Australian parent banks are sourcing an uncomfortably large proportion of their funds offshore in the midst of a downturn. In the end NZ will feel the chilling effects in one way or another.

"Most of the domestic deposits are invested in terms less than 12 months"

Wrong

"The average bank core funding ratio hit 88.7% in July, the highest for a July ever and the second highest month ever. Higher is better. Core funding is funding that can be expected to mature longer than in one years time"

Yvil - you’ll find that its the wholesale funding thats greater than 12 months that is part of the banks core funding ratios. Retail domestic deposits comply so long as theyre greater than 30 days, hence the penalties for shorter terms

Yvil,

You are the one who is wrong. Some 80% of our bank deposits are under a year.I would refer you to David Chaston's article on March 5th 2017 in this forum.

Bad news for depositors but good news for borrowers as this means NZ banks are less reliant on offshore funding for on-lending to NZ borrowers. D Chaston said in June NZ banks source only 16% of their funds from offshore for NZ lending, this is now clearly reducing, hence sheltering NZ borrowers from possibly rising offshore rates

Just so you understand correctly, NZ or Australia banks don't "rely" on wholesale funding for "lending capacity". For example, the banks cannot borrow NZD from Japanese housewives so NZers can speculate on houses. The primary value of wholesale funding is for banks to generate greater profits as the cost of offshore funding has been lower thereby increasing bank profits.

J. C. Are you sure you know what you're talking about?

Yes. Commercial banks cannot borrow NZD from Japan for you to speculate on houses. Furthermore, commerical banks do not rely on wholessle funding for lending capacity, but for profit margin.

Are you suggesting bonds issued by NZ Banks can't be sold to overseas investors?

Never said that. I said that mortgages could be funded entriely through deposts.

that not how it read to me..
"For example, the banks cannot borrow NZD from Japanese housewives so NZers can speculate on houses."

If banks can sell bonds to international investors then that is exactly what they can do.

Nope. The Japanese hosewives do not hold NZD. They may indireclty buy bonds issued by NZ banks, but they never lend NZD. It's very important.

So somewhere along the chain there is a broker and a forex transaction that trades their yen for NZD. Not seeing how that is not overseas funding if a Japanese housewife ends up being the holder of a bond issued by a NZ bank.

but the mortgage comes first?

Businesses don't see a future thats worth investing in. Don't worry though, the RB has your back.
The reality could be something else.

Another sidebar to the July drop: most businesses with a June 30 y/e will have had a preliminary look at the FY2018 results, and made investment judgements accordingly. It could be an indicator at least for some, that their BS ratios and PL results are less than spectacular, and that the Precautionary Principle has taken over.....look out below, especially for Gubmint tax revenues.

but the government is in spending mode, not cutting mode.

Retired Poppy, I can tell you if you owned a reasonable quality rental in Christchurch at the moment it shouldn’t really be vacant.
we recently bought at auction a property a couple of weeks ago that we haven’t settled for yet,
We have advertised it and have had so much interest in it, it isn’t funny.
We haven’t shown too many thru so far as the owner is still in residence.
We have had applications from several so it is just a matter of doing our checks.
Another property my wife is renting for someone else had heaps of interest as well and this time of year is not normally a very busy time!
House prices and rental prices are holding up extremely well in Christchurch and there is no better investment than bricks and mortar providing they are positively geared
Don’t like subsidising other people’s lifestyle!

"Don’t like subsidising other people’s lifestyle!"

So get rid of the Accommodation Supplement you say??

If the Accommodation Supplement wasn’t there for some, then there would be more living on the streets.
Wouldn’t know how many of our tenants get the supplement but every single tenant we have is either at Uni or works.
We have not one tenant on an unemployment or Superannuation benefit from what we know.
By removing the accommodation supplement may in fact help the country by making people more responsible for their actions.

If the Accommodation Supplement wasn’t there for some, then there would be more living on the streets.

Also likely to have massive implications for the economy, including house prices. Similarly, removing WFF would decimate the economy.

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The man - if you're a landlord, someone else is subsidising YOUR lifestyle. There is nothing a landlord can do for a tenant, that the tenant couldn't do better as an owner. Sense of community buy-in would be better too. Landlords just live off the tenant's income. I'm not alone in this view:

"Roads are made, streets are made, services are improved, electric light turns night into day, water is brought from reservoirs a hundred miles off in the mountains — all the while the landlord sits still. Every one of those improvements is affected by the labor and cost of other people and the taxpayers. To not one of these improvements does the land monopolist contribute, and yet, by every one of them the value of his land is enhanced. He renders no service to the community, he contributes nothing to the general welfare, he contributes nothing to the process from which his own enrichment is derived…The unearned increment on the land is reaped by the land monopolist in exact proportion, not to the service, but to the disservice done".

— Winston Churchill, 1909

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I think PDK just put TM2 in his place.

We need to come up with a new title for people who rent out property surplus to their needs, this whole Land-Lord thing only serves to inflate their ego.

Maybe we could call them Housing Beneficiaries, call it for what it is without being too nasty about it.

Land-parasites? Land-Leeches? Man = boy, collects rent.. I better stop right there.

Sometimes a landlord makes a profit from tenants, sometimes the landlord subsidizes the tenants lifestyle. I spent a full decade renting after owning for two decades, and my various landlords during that time period all made less money from my rent ( and capital appreciation) than what I'd made via term deposits with the equivalent amount of money to purchase the home I rented.

Vilifiying landlords just because they are landlords makes no sense, they are providing a service with the hope of making a profit while risking their capital. I'll never become a landlord myself as I do not like the risk to reward profile. I can understand why some go down that path, and when the circumstances are right I will cheerfully use their services when it makes sense.

Dehumanization of any subgroup is not a positive, regardless of whether it is based on ethnicity, political affiliation, income, or vocation. Passing judgment on individual actions... another item altogether.

As to landlords never providing a service that home ownership wouldn't be better, that is rather silly idea that shows a clear absence of imagination. What if I had a short term job assignment where I knew I was moving in a year? How about the idea of trialing living in a particular community? What if I wanted to trial a lifestyle section but had never lived on anything larger than 600m2 in the past? What if I didn't want to own a home in a declining price market? There are many more great reasons to rent, the above are just easy ones, as I've used them all at various times during my decade of renting.

Nzdan. A lesson in Phylum Arthropoda, Class Insecta, and Order Blattodea (cockroaches)

Sadly cockroaches have developed all sorts of ways of surviving changes in the environment and they often survive after the removal of limbs (foreign buyers), reduction in daylight (removal of housing allowance and negative gearing), reduction in feeding (lower immigration, and reduced numbers of dodgy universities and students)........ I guess we'll find out if the changes to their feeding environment effects their behaviour, they are however resilient creatures that are recognised more for their cognitive dissonance than their consistency.

And yes PDK did put TM2 in his place..... but he probably won't recognise that reality.. or understand.

Certainly an underappreciated quote in NZ, where the norm in recent ideological decades has been to have the working plebs paying the taxes while the speculators enjoy tax-free income.

Foyle's 13.14 post might be onto a contributing factor. I've been rebalancing our personal portfolio to a defensive position for some time now and increasing cash holdings which are rotting in the bank on FD. I imagine there will be other old farts like me doing the same.

We've put a hold on further expansion of one of our medium sized businesses that is going very well. Not because we need to given it is a strong performer with great potential and has modest debt but because we sit at the table, look at each other and no-one has that life on the edge urge anymore. Instead, the monthly surplus accumulates and pays down debt. Boring but safe.

And imminently sensible, may I say.
I rid myself of debt about 3 years ago. Possibly slightly too soon but happy now to have done so.

It's just an age thing and the secret to life is knowing when you have made it and you just enjoy life instead of trying to make that next million dollars.

Carlos67. True. But the retreat to dull and safe investments is boring. And when you have enough it is no longer about the money - the thrill of just identifying opportunities and either passively or actively investing in them and watching them thrive, is in itself as enjoyable as ever.

I hate to say I told you so but... I told y'all that business lending would get a smack-down based on the the historical loan acceleration graph - see here. Household loan acceleration seems to be a leading indicator of business loan acceleration with a lag time of about 9 months. The good news is that if all goes well then household loan acceleration will become positive later this year and business loan acceleration should become positive late next year.

Mr Chaston
I have found this piece you have summarised above a very useful data set , hope you are planning regular updates
Cheers