Opinion: Desperation creeps in as banks plead for the punters to start borrowing again

Opinion: Desperation creeps in as banks plead for the punters to start borrowing again

Cashed up banks are increasingly pleading with their customers to borrow more.

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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42 Comments

Get stuffed.

They have crimped off too big a length into their own nest....who would be dumb enough to borrow to buy a price bloated bog standard dunga of a house when it's as clear as a rotten hunk of Pinus Rhubarb where prices are heading.....the banks have stuffed their own market...harrrrrrrrrrrrhahahahahaaa

Strange first comment. I guess the bakers go back to lending on the back of a match box to all and sundry and we go around the circuit again

The less people borrow, the lower mortgage rates will go. And in a market where even the Government is making all the right noises about property, with their regulatory changes etc; one would have to be mad to buy at the  current price levels, with rates "so" low! When property prices have significantly fallen, and mortgage rates have collapsed, then might be the time to concider a purchase. But that's a long, long way off....

I agree with Wolly on this one. We saw 2007/8 coming a mile off, and raced to get debt-free. Anyone who choses to go there now, better have a skill that will be in demand post-peak - the wherewithal to repay will be increasingly harder to come by.

 "a skill that will be in demand".....spin doctor PDK....easy money for BS!...semi permanent position in the Beehive...office view of Bollard's ivory tower on the Terrace!

Skills in demand are ppl who can make and fix things.....

regards

Spin doctor Wolly - you'll be sweet.       :)

No way PDK...done with 'working' in the Beehive some time back...too much bullshit on the floors especially on the 9th...gets a might stinky at the top.

No need for desperation banks! All your bank economists are saying the boom times are coming back and people are going to be plunging into property again!  

I doubt anyone will be "plunging into property again" in Canterbury for a while. Woken up at 3am by a rather decent shake again and wondering who will actually want to build/rebuild/buy houses for the next 2-3 years until things calm down (and I sure hope they will).

Might be big demand for Yurts Elley....in Canterbury....nothing will shake them down....

Yeap thats why insurance companies will not deal with any fixes until there is a period of non activity..I asked them what is the period...three months with no aftershocks over 4.5..guess the clock got turned back last night..again.

It could go on for years and years....calm then boom...calm then boooom...on and bloody on...

Ive been paying down debt as fast as I can for 3 odd years, nothing is going to make me change that.....

Houses have deleveraged, yeah right...cant see a huge sign of that in those numbers...

regards

The other sided is household deposits have gone up $7b in the last year and total deposits are up $11b

http://www.rbnz.govt.nz/statistics/monfin/c8/data.html

http://www.rbnz.govt.nz/statistics/monfin/c7/data.html

So households net decrease in debt $3.6B, across all sectors $6.5b.

All the comments above are by people who don't know anything about the keeness of banks to lend because they are not in the market to borrow money.

In fact most of the comments above are by people who think it stupied to borrow money and hate the banks.

I am a long -term property investor with  loan agreements with three banks in New Zealand.  I have numerous loans with each of the three banks.

So, unlike the previous commentators, I am in the market to borrow money. I am finding the opposite to the rather bullish tone of this article. One bank has written to me urging me to talk to them about borrowing their money. Note I said "talk".

I have had no such communication from the others.

I believe some of the bank chatter around lending money is just bank talk to show they are doing something. The reality  is they are still very conservative about what and who they lend to.

A farming friend of mine has confirmed this view with me also.

 

I agree Your Landlord

The banks will NOT lend to you unless you have a deposit, a good income and credit history.

My pre-approval has been extended no questions asked....just waiting for that 2yr rate to drop now :)

28-29 yr old

That's not what I'm hearing from mortgage brokers.

They relayed to me a story of a first home buyer who managed to borrow over 100% of the value of the home from Westpac.

Another told of a non-citizen without a permanent job able to borrow 95% from ASB on the strength of a guarantee from a parent.

They're up to their old tricks again.

cheers

Bernard

What risk? The Banks have no risk! You take it for them.... either directly, by borrowing ( you pay them, for the right to assume the risk!), or indirectly by being a taxpayer. If any of them 'went down', we'd just do an Ireland, and take them onto the Government, your, balance sheet.  

Not at all! Prices can fall 70%, and as long as the borrower can service the loan, that's all the bank cares about. If the borrower defaults, the bank provisions against it, and deals with it in due course. The banks 'product' is money. It couldn't really care less what the underlying asset is, or may do, as long as the repayments come in. A banks job is to get repaid, not to take security as a first line of business. It's 'your' job to do the repaying....and to take all the risk!

'The banks were just as 'cautious in other places, Westminster. It's just a matter of degree. The only things that has caused financial stress in the property market is the inability of borrowers to repay their loans. The security level is immaterial to banks, in the grand scheme of things....until more people than they anticipated, default ( eg: USA). Their security means little, other than whatever laws apply to preditory lending etc. and a plank of last resort. Banks lent at over 100% in some of the other markets. Did that indicate that their market was 'stable' or 'on the up'? If you think 95% + LVR is an indicator of market soundness, then that should have applied. It's access to debt, Westminster, that drives an asset market. Nothing more, nothing less. Would you have been able to buy without it?

Thats why house prices are inversely related to the unemployment rate (the ability to pay with or without a job :)

This is your Tuesday lesson in economics westminster...don't come back now until you have mastered it....bye

 http://www.marketoracle.co.uk/Article28035.html

You sound incredibly desperate.

Tying your financial future to property debt doesn't seem to have been such a great plan now, does it?

What a 'tosser' conclusion westminster...you need to return to class boy....the banks are offering 95% because they need to blow hot air into the buubles or face the consequences..think about it...doh.....

BH: Another told of a non-citizen without a permanent job able to borrow 95% from ASB on the strength of a guarantee from a parent

POP: So what? this has always been the case, if there is not enough equity a guarantor is always required.

Many homes hae been purchased with the direct help of a parent, either with the deposit, or the guarantee, or both.

I think it is YOU up to YOUR old tricks actually...

President of Property

Cheez.. tor lawn you must be loaded to say you never understand  why people have to borrow to buy a house. You cant live in any of the big cities, or you are well over 60 to be saying that. Umm don't buy a house...or rent for $500 a week, either way rent equals dead money...interest equals dead money...as long as interest  is less than your rent then I think rather have a mortgage..so would BH otherwise he would'nt have this website.

"Buy the biggest. most expensive properties you can borrow against" is the correct mantra of a rising market ( The Pendulum Effect - 10% increase on a $300k = $30k; on $3m = $300k etc). Borrowers and lenders go crazy! In a falling market, the opposite applies. Those buying, or 'trading up', to take advantage of The Pendulum, dry up, and borrowing falls ( that's what's starting to happening now). A swinging pendulum doesn't stop at the bottom; it 'overshoots', before is settles, or swings back the other way. Given the magnitude of the 'upswing' we have a rather nasty, and accelarating, price-drop period to navigate through. Of course, the Government could put 'a block' in the system. But that just temporarily halts its movement,  the momentum has gone, and eventually the system stops...at the bottom, and it takes a lot of effort to restart it.

The Govt has put a huge block in the system by bullying Bollard to reduce the interest rates to the ridiculous levels they are now.

NZders have now got 50% of their mortgages on floating.  28% fixed for a year or less.

There is now 68 billion borrowed on mortgages at an average rate of 6.43%

Interest rates only have to move up .5% and the wastemasters of this world will have to find another 800 million dollars pa to cover it.

I'd say that would be kicking the block out of the system:)

well the government is leading by example... if they can borrow billions of dollars to help out their cronies, why shouldn't the average kiwi punter borrow to help himself out... if the banks are lending again, I say go for it! Lets keep that property boom BOOMING!

Bill Bonner this morning on Cash

 

 

Here's our old friend Merryn Somerset-Webb, editor of MoneyWeek, on the subject:

Why you should hold cash

A long-term property bear told me this week that he was going to buy a flat. Why? He can't bring himself to keep his money in cash when savings rates are 3%, inflation is 5% and income tax is 40%. But he can't bring himself to buy much else either: most equities look overvalued; commodities could easily be on the edge of another cyclical peak; and there is only so much gold a man can hold. But his money "has to go somewhere". And at least property offers some kind of yield.

I can see his points - holding cash in an era of negative real interest rates can feel painful. But what if it's the least bad option? Dylan Grice of Société Générale points out that while it's true cash "generally has a zero expected real return", there is at least a "near- certainty around that expected return". Mostly if you hold cash you know you won't make money, but you won't lose much either.

That's not usually good enough. Most of the time, risk assets return more than 0%. So it makes sense to be biased towards equities, bonds, commodities, houses and wine instead of cash. But there are also occasions when risk assets are unlikely to return more than zero - times when the risk of losing money in non-cash assets is so high that it makes more sense to aim for a zero return than a real return. Now, says Grice, "might just be one of those times".

Merryn is probably right. At least, that's what we concluded at the Family Office too. The Bonner family holds an uncomfortably large amount of its portfolio in cash.

It is uncomfortable because we believe cash will soon be the very worst place to keep your money.

AJ - the best use of cash, is to turn it into 'things I need in the future'.

Coils of alkathene, solar panels, solar hot water, tanks, build youself a methane digester, superinsulation, garden,......

If all materials are based on oil, they're never going to be relatively cheaper than now - and if that's not so, it can only be because incomes have dropped - which comes to the same thing.....

This is an upside-down bell-curve - things got cheaper and cheaper per Adam Smth, until they got scarcer per head, as per Malthus. Any mathematician worth his/her salt (thing about that for a second; salt-solarium-salary) could have worked that out, any time in the last 200 years....  

Good self-justification for the born hoarder.   :)

 

Im a 63 yo dairy farmer, 420 cows and have a $3.9m mortgage due to marriage breakup settlement . 12 months ago also had $100k overdraft.  Now, due to an `average` production season , cutting costs to the bone (no autumn fert, very little farm maintenance ,reducing stock numbers and coupled with a higher payout ,I have no OD, have repaid $120k of mortgage debt and will repay a further $200k by November. I came off a fixed interest loan at 9.12% interest on 4th July 2010 onto a floating rate. Two weeks later the bank increased the `margin' citing `risk factor'.....

Last week the bank rep told me `dont be in a hurry to repay debt'  .  Two thirds of my mortgage amount is now at 5.95%, the rest at 6.15%.

I no longer trust my bank, they are not my financial partner but a hard nosed lending instituition  that wont hesitate to tighten the screws when payout drops and interest rate increases. I have told them that when the day comes that I cash up the farm I wont be investing with them. My  focus over the 2010/2011 season will remain on reducing debt and I believe many farmers share my  attitude. 

".. they are not my financial partner but a hard nosed lending instituition  that wont hesitate to tighten the screws when payout drops and interest rate increases."

Very true.  Never be fooled by the public face of the banks.  Having worked on the inside the public perception bears little resembalance to the inner workings I can tell you that for sure.

Heres a first hand  example of how keen the banks are to lend.

My youngest daughter(age 22), has just graduated after 4 years at uni ,and she has a a $50k debt  to the Student loan scheme. She and her partner(age24) have a combined takehome pay of $85k and they have just bought an entry level 3bdr home in Hamilton in an OK area for $285k. The people they purchased it from had bought it as a rental 4 years ago for $310k.

They had $20k deposit and Kiwibank has loaned them the balance I think at the one year rate.(5.2%?)

They currently  have one flatmate paying $120/week.and are seeking another.

Their goal is to pay off $40k/pa which if they achieve that should see them in a sound position in 3 years time owing around $145k.

Fingers crossed for them that interest rates dont take too big  a hike.

I guess its also an example of how affordable a home is for a young couple that are prepared to delay having a family , take the risk of borrowing and work hard. 

 

Pretty much a good scenario, and the way it should be; a house as a home. One fly in the ointment though ( hey, don't I always have one!). What happens if 'the partner' sods off with a new one? 22 & 24....it happens more than you may plan on....Being actually married often helps in the 'negotiations'.

Isn't that what I said....a good scenario?

Get rid of any existing debts before accruing new ones.

Wow - obviously the banks are relying on the government continuing the interest free student loan scheme.

And the previous owners lost 2% per annum in capital value.  Wonder if the rent they charged fully covered their expenses, including the costs of borrowing?

It is indeed a tenuous time for the young ones to make these decisions but good on them for having a plan and going for it.  Sounds to me like they will do fine as they've thought it through and have a plan for reducing debt in the short term.

Yes well the banks are now under pressure to deliver to shareholders. They got away with it this past financial year by riding on lower loan loss provisions and widening margins from the drift of fixed to floating. When that comes to an end very soon they will have to take on more risk in the lending market to deliver the numbers.

Hence the return of low deposit home loans and the encourgement to reduce deleveraging activity.

A great example of bank stupidity is the BNZ borrowing $1.7 billion of new money with no market to lend it to. No wonder they're getting desperate.

I'll take it. All $1.7 billion, why not just make it 2

President of Property