Bank coffers are full; bank margins are falling

Bank coffers are full; bank margins are falling

By Roger J Kerr

It is a busy week ahead for the moneymarkets to interpret the various releases of domestic economic data with retail sales out on Monday, followed by the National Bank regional economic survey, Roy Morgan consumer confidence survey and wholesale inflation with the PPI later in the week.

I would not expect any of these statistics to push short-term interest rates downwards; however they are more likely to confirm the marginally higher yields the interest rate markets have been pricing-in over recent weeks.

As we head into the crucial Christmas retail spending period, there are sufficient signs to be more optimistic that the trading volumes will be up on last year.

A key driver of consumer spending is employment and job security.

The labour market over recent months has not been as weak as the gloomy economic picture painted by most forecasters. More part-time jobs are being filled, particularly in the food and manufacturing industries exporting into the booming Australian economy.

The economic data should confirm the higher one to three year swap rates; however perhaps the more dominant influences on these swap interest rate from here will the NZD/USD exchange rate and US bond yields.

I remain confident that the NZD/USD exchange rate will retreat from 0.7700 back to 0.7000 due to a recovering USD (which already seems to be occurring) and this will negate any need to maintain NZ short-term rates lower for longer due to a higher currency.

Governor Bollard’s “jawboning” down of the NZ dollar last week was not too surprising and one would agree with his scenario of lower interest rates for longer if the NZD remained up at 0.8000, as weaker export performance would reduce GDP growth. I do not anticipate that this scenario will play out due to the FX market view that China is tightening monetary policy (bad news for hard commodity prices and the AUD) and the US dollar was sold before QE2 and is now gaining ground on unwinding of market positions.

A lower NZD/USD exchange rate and continually improving economic data still suggests that by January or February the RBNZ will be forced to review their 2011 GDP growth forecasts upwards.

Longer term, I still hold to the view that NZ interest rates will settle at around 5% to 6%, lower than historical averages.

A major determinant of the lower and more stable interest rate environment is the introduction of the Core Funding Ratio regulatory rules by the RBNZ on the banks’ debt funding books. We have already witnessed the impact on retail deposit interest rates from the banks needing to fund their books from a higher proportion of domestic money. The banks have been paying 4.50% to 5.00% for medium term funds for over 12 months now.

In a way this has caused monetary policy settings to be not as super loose at a 3.00% OCR suggests. The true market interest rates have been well above official rates for a long time, therefore the bank’s cost of funds have been higher. Therefore, the Core Funding Ratio has already made an impact on general monetary conditions without any OCR change from the RBNZ.

As I have stated previously, it is not a healthy situation for monetary policy management to have actual market interest rates (bank deposit rates above 4.00%) so far away from the Official Cash Rate. Mr Bollard might be raising the OCR next year (only catching up to market rates) and it will have no impact on the banks’ cost of funds or spending/borrowing/saving behaviour in the economy.

What is now becoming apparent now is that a number of the banks are becoming very flush with excess cash on their balance sheets as they are not seeing any lending growth. Big corporates borrowing billions from the US Private Placement debt market will exacerbate this situation.

The banks are being forced to revise down lending margins and they are no longer paying up for retail deposits now that their funding books are in order to meet the Core Funding Ratios.

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 * Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com

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15 Comments

Are these same banks not also sitting on billions of dollars of losses in housing and farming?

 They look broke to me.

..or are banks increasingly becoming our future landlords? 

Haha yeah I bet those banks have teams of valuers and accountants updating their balance sheets regularly with the current value of the mortgaged asstes on their books... more like they dont realise the losses until mortgagee sale comes around.

If it aint broke, dont fix it!

So who is telling us these things? Is it people who invest in property and want everyone else to start investing in property again?

"So who is telling us these things?"

That's our Roger, he always says the same thing, just with different dates on it.

They may have plenty of dosh but no appetite for risk yet.

I need to refinance a commercial property but they wont go over 55% first mortgage.

Good job I dont need a overdraft for the business as its almost impossible to get if one did need.My business has increased t/over over the last year but the banks are all very negative and tend to lump all business sectors together and tell me that bad times are around the corner and tighten up.I think they are fools personaly.

I have read a few comments on this site saying all business should deleverage,which is not a bad idea but will ultimately lead to fewer jobs and maybe even deflation if we are not carefull.

"Banks...tell me that bad times are around the corner and tighten up.I think they are fools personaly."

You should borrow and spend as much as you can as fast as you can.

Risk appetite will be back shortly.

de ja vu coming soon.

Just keep telling yourself that.

Captain Kidd has it right: i is not a lack of demand from businesses that is the problem - there is plenty of that. Rather, it is lack of risk appetite from the major banks.

I own a medium-sized business with a solid balance-sheet and no O/D or term debt - good credit history and long relationship with the bank. Profitability is poor - we are just breaking even. However, never any problem in servicing a modest OD.

Our account manager at the bank has informed us (politely of course) that credit will NOT be forthcoming unless we have property against which to secure the loan - top up the house loan for example, and then only on a recent valuation.

Funds secured against our business / cash-flow are not available.

So if your own a business, your mortgage is maxed out and you don't have any rich relatives to borrow from, you will need your lotto numbers to turn up if your are going to survive.

Spartan

You don't have a 'solid balance sheet' spartan....you have a "lazy balance sheet"...!

Trim your costs mate. learn to do without an O/D. Tell the banks to piss off.

Correct Wally. Powerdown means less and less ability to underwrite debt. Better without it, from here on out.

His problem may be the domino one where late paymentscascade, of course - I have some sympathy with that, but not with the arrogance of the system as a whole.

Wolly & Spartan, I was just looking at the annual accounts from the parent company of Envirowaste Services. Owned by Aussie private equity group Ironbridge Capital, it has interest bearing liabilities of nearly $385 million including bank borrowings of $202 million maturing in 2012, annual interest expenses of $36 million, a net loss of $10.5 million and equity deficit of $16.4 million. I guess that's not a lazy balance sheet...

Amazing really that  if property is such a lousy investment, as I read so often here, that it is one of the only securities that banks are comfortable with!

(1) Rule No. 1 of lending: It's not about the security - it's about the ability to repay.

(2) The Banks lend against property because of the statutory weigthing that it currently attaches to their capital ratio requirements. Change that ( and it will be changed !) and the incentive to lend to property diminishes

(3) Banks are really only selling their customers risk, when they lend them money, and charge them ( the borrowers) for them taking that risk! Nice business, if you can get it!

(4) Property is not always a 'lousy  investment" It just happens to be in New Zealand, right now, as the numbers do not stack up. Those who need or want to sell, should do so now, whilst there is still a market of sorts to sell into.