By Gareth Vaughan
After a big week in the banking sector last week with three of the country's big four bank's reporting interim results and KPMG's annual Financial Institutions Performance Survey released, what's the key message from the sector?
The banks are really keen to lend. And here I emphasize the REALLY. There's even a hint of desperation creeping in because after all, when you're in the business of lending money and people aren't borrowing much, life must get pretty frustrating.
The big banks are in agreement that, after the shock of the Global Financial Crisis and subsequent deleveraging, and with 95% home loans being advertised again, the time is ripe for the punters to start borrowing again.
Here's example "A" from BNZ CEO Andrew Thorburn:
"Deleveraging has been happening. I think that has been necessary. But what we've got now is sufficient businesses and corporates in good enough shape where the demand for our (New Zealand) products and services in key offshore markets like Asia, the US and Australia is quite strong."
"I think we should be stepping out more confidently because there's no way New Zealand is going to achieve its potential as an economy if we don't have businesses growing, creating exports, creating profits, creating jobs. And I think that's something we as a country need to be a lot more supportive of." (See more from Thorburn and BNZ CFO Ken Christie here).
And example "B" from Westpac CEO George Frazis who says New Zealand needs to move "from caution to confidence":
"If you look at the balance sheets of both business and personal (people/households), there has been a huge deleveraging over the last 18 months which places them in a really good position for investing for growth. The government has done all the right things in terms of investing for infrastructure."
"My sense is we are seeing early signs of (improving) retail sales and also house prices, and they’re good indicators that now is the time to invest for growth." (See more from Frazis here).
And finally, example "C" from ANZ CEO David Hisco:
“As New Zealand’s largest bank, we are playing a key role in supporting businesses and assisting the economic recovery, including the establishment of a NZ$3 billion new lending fund to Small and Medium Enterprises (SMEs) late last year."
Credit growth anemic
The problem for the banks, who have come through the Global Financial Crisis pretty well and recovered from the big hit to their profits in 2009 when they settled their structured finance transaction tax avoidance disputes with the taxman, is demonstrated by the latest Reserve Bank sector credit figures.
Lending growth, where there is any, remains weak and the banks are well funded and ready to peddle debt. Here, witness BNZ's cash and liquid assets of more than NZ$8 billion bolstered by last November's NZ$1.75 billion covered bond issue in Europe. BNZ has the money and wants to lend it, but at the moment supply is way ahead of demand.
The Reserve Bank figures show agricultural debt in March flat year-on-year at NZ$47.5 billion, business debt up just 0.1% at NZ$73 billion, consumer debt down 0.8% at NZ$11.8 billion, and even household debt - dominated by home loans - up just 1.2% to NZ$183.4 billion.
The deleveraging story doesn't, however, appear to have made too much of a dent in household sector debt. As a percentage of nominal disposable income household debt was sitting at 153.5% in the latest available Reserve Bank figures, for the third quarter of 2010. Servicing costs as a percentage of nominal disposable income were at 10.8%. These figures may be down a little from respective peaks during 2008 of 159.3% and 14.9%, but they remain high.
Dun & Bradstreet was mindful of this in its recent warning that many New Zealanders are struggling to balance their income and credit commitments. The credit reporting agency cautioned that future interest rate rises could be "the trigger that causes distress for many households" with 34% of respondents to Dun & Bradstreet's Consumer Credit Expectations Survey saying they expected to use their credit card to pay for otherwise unaffordable expenses.
But hey, some of us are borrowing. My wife and I are increasing our mortgage (don't tell Bernard) as we renovate our house for an expanding family. We're a bit nervous about doing so but with a house on the Auckland isthmus, job security (hopefully) and the alternative being moving further out and commuting further, we decided to go ahead. But not everyone wants to do this, or as Dun & Bradstreet points out, not everyone is in a position where they should be.
And some of our businesses are borrowing too. At the big end of town, Fletcher Building is using a mixture of new shares and debt to fund its NZ$1 billion takeover of Australia's Crane Group and Mainfreight is using bank loans to fund the entire up to NZ$224 million purchase of Dutch firm the Wim Bosman Group. But leveraging up doesn't suit all firms. And many business leaders no doubt remember 2008/09 all too well, when equity in their business was eroding and their banker was knocking on the door demanding repayments or higher interest rates.
Combined profit up a third for the big four
And really the big banks are trucking along pretty well. ASB (which reported back in February) recorded a 58% rise in first-half year profit to NZ$293 million, ANZ a 24% increase to NZ$478 million, BNZ 11% lift to NZ$283 million and Westpac a 68% jump to NZ$210 million. That's a total of NZ$1.26 billion in interim profit, up a combined NZ$312 million, or 33%, from NZ$952 million in the same period of the previous year.
But if lending's not growing, what's driving this?
Provisions for credit impairments fell, despite the February 22 Christchurch earthquake. Overall across the four banks impairments fell by NZ$400 million in the half-year to NZ$353 million. The only bank bucking the downward trend was BNZ where they rose by NZ$7 million to NZ$95 million. At the country's biggest bank, ANZ, they tumbled to NZ$85 million from NZ$330 million. That's even though the bank's gross impaired and 90 day plus past due assets now represent 1.96% of total gross loans, up from 1.85% a year earlier.
Also helping is the new found love affair us folk with home loans have for floating, or variable, interest rates as opposed to fixed-term rates, have. The percentage of New Zealand's NZ$168.2 billion worth of mortgages on floating rates has just popped up above half for the first time since the Reserve Bank started collecting the data in June 1998. This is a huge switch from 87% on fixed-term rates as recently as January 2008.
Why is this good news for banks? A big chunk of their lending is in housing. ANZ has about 56% of its book in housing and now has 46% of that on fixed rates compared with 68% a year ago. The banks do better out of floating mortgages because the margin between the variable rate and short end of the yield curve, such as three month bank bills, is higher than the margin between the swap rate and fixed rate mortgages. Floating rate mortgage spreads can be 30-40 basis points higher than fixed rate spreads.
Then there's what the banks euphemistically term "repricing loans for current market conditions." Or to the rest of us, hiking interest rates.
So the net interest margins are looking pretty good; ANZ up 23 basis points year-on-year to 2.44%, Westpac up 22 basis points to 2.29%, BNZ up 16 basis points to 2.24% and ASB up 40 basis points to 2%.
So what of the future? The banks still have some "repricing" of their fixed-term mortgage books to go which should continue to help margins. Of the NZ$83 billion worth of fixed-term mortgages, more than half - NZ$47.6 billion - is on a term with less than a year to run. With floating rates likely to stay below the bulk of fixed-term rates for some months, a continuation of the fixed-to-floating switch should keep helping the banks' margins through 2011.
Then, for their future growth, not to mention lending volume and dollar targets, the banks want and need us borrowing again. But in the meantime, even with flat or negative lending growth, they're not doing too badly thanks.
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