The economy is estimated to be around $360 billion, yet bank loans exceed $500b. On top of this, they make eye-watering returns on equity and profits. Photo / NZME
The economy is estimated to be around $360 billion, yet bank loans exceed $500b. On top of this, they make eye-watering returns on equity and profits. Photo / NZME
Opinion
OPINION:
The role of banks in the economy doesn't get enough attention.
Banks are exceptionally good lobbyists, and few commentators really understand banking. The economy is estimated to be around $360 billion.
Bank loans exceed $500b. They make eye-watering returns on equity and profits. A large portion of therise in the Government's company tax take is coming from surging bank profits.
I am going to start broad. There are so many issues I want to dive deeply into. Consider it the appetiser before lots of main courses.
The banks' non-performing loans sit around 0.4 per cent of total loans, banks are well-capitalised (and well-run), signalling an economy and financial system in a strong position to handle a likely recession ahead.
The Reserve Bank's August monetary policy statement went within a smidgen of calling a technical recession (0.1 per cent gross domestic growth over six months in 2023 is an economy on the cusp of recession).
So, we know what is coming. Smart businesses are being proactive before real problems arise. Eyes should be on margins, the epicentre of any business.
When the interest rate cycle turns, you follow the trail of debt. Housing debt has risen by almost $90b (36 per cent) in four years. Agriculture debt has been flat-lining, dairy debt has dropped, and business sector debt has risen by $17.6b (16 per cent). Small business lending has shrunk, with larger businesses favoured.
The low risk-weighted asset, housing, is now the high-risk one.
Housing is now 62 per cent of total bank lending, up from 52 per cent two decades ago, and a large chunk of business lending is also secured against residential or commercial property. Less than 10 per cent of bank lending does not have asset-backed security.
The Organisation for Economic Co-operation and Development (OECD) came out last year with their economic survey on Australia, pointing out various issues with accessing finance and highlighting long-standing concerns about financing constraints on small-to-medium sized businesses (SMEs) in that country. The headline in an Australian Financial Review article summed it up — "OECD to banks: lend more to SMEs without real estate security". They could have said the same thing about New Zealand.
Out of every downturn there are opportunities. Many people are now acknowledging housing's era of massive gain is at an end and a different trajectory lies ahead.
Housing debt has risen by almost $90 billion in only four years. Photo / 123RF
The challenge is to unlock other investment opportunities. Housing is still more than 50 per cent of the household balance sheet.
Change is no easy task, with a recession around the corner and inflation favouring bricks and mortar, and some banks in lending hibernation.
It is time an institution or group took a lead and pushed for the obvious — putting in place a constructive plan to unlock opportunities beyond housing.
We have done this before in parts and tend to do it in dribs and drabs and in a piecemeal manner. Let's now get serious. Start with the risk weights on lending which excessively favour housing.
What bank is going to step up and be the flagbearer for businesses? We need one to be bold.
Don't just blame the banks
We see many businesses which are simply not that bankable. A bankable business is a saleable business.
Business takes more work to manage than housing — it has working capital, seasonality and many moving parts versus a monthly or fortnightly automatic payment on a mortgage.
Covid has made financial comparisons with earlier periods more difficult and a volatile world has done the same to forecasting. Businesses, especially small-to-medium-sized firms, need to get better at telling their story and understanding what a bank needs to give a loan approval.
Bank staff are now so captured by compliance that their time to do real banking stuff is limited. Compliance is needed. What is not needed is ridiculous stuff like the Credit Contracts and Consumer Finance Act.
Dining out on cheap on money
Serious questions need to be asked about the Reserve Bank's Funding for Lending Programme for banks to access cheap money — why it was needed and why some banks are still dining out on it. A crisis management tool was put in place when banks were flush with cash.
Term deposits are less than 40 per cent of total bank deposits. They used to be more than 50 per cent. More money sits in transaction and savings accounts.
Transaction accounts are one-third of deposits and are for banks they are free money. They used to be 20 per cent of deposits five years ago. Interest rates on savings accounts sit massively below the Official Cash Rate.
Banks are seeing some lift in wholesale funding costs, but their overall funding costs have not risen anywhere near that. Be wary of conversations citing higher funding costs to justify rate increases.
The competitive landscape
Non-banks are capturing market share, writing almost 10 per cent of the rise in net home lending over the past four months. That is a staggering percentage for a sector that has less than 2 per cent overall market share. We can see some pushing up the risk curve as borrowers seek alternatives, and banks have tightened their tolerance for risk. I am mindful of the 2005-08 finance company debacle.
But many non-banks are now focused on prime deals, a real layer above traditional finance company transactions. There is a strong service element, working with customers, reshaping deals into bankable ones.
Off to the races
The pending financial results of three major banks in a couple of months (ASB has already delivered a record number) should draw attention to two issues.
The first is the competitive landscape. Why are bank profits in New Zealand so high? Why is even more competition not unfolding? How can we accelerate more competition?
The second is cost-to-income ratios that look likely to be below 40 per cent, levels thought unachievable in the early 2000s. This should be raising questions whether banks are reinvesting in systems and their long-term capability or demonstrating stakeholder capitalism (the long game) principles as opposed to a shareholder capitalism (short-term) fixation. A key problem for banks at present, though, is finding IT staff to make that reinvestment.
The bottom line: banks are at the epicentre of New Zealand. They deserve more attention.
- An economist for 20 years, Cameron Bagrie is a former ANZ chief economist and has worked for the National Bank, Treasury and Statistics New Zealand.
