Disappointing mortgage rates haven't fallen further, Reserve Bank tells MPs

The ANZ National Bank has issued a statement stressing that it's strong and well capitalised.

It is disappointing that banks have not dropped mortgage rates further as more people face loan defaults in the coming year, Deputy Reserve Bank Governor Grant Spencer has told MPs this afternoon.

More people will be facing loan defaults, said Spencer, who was speaking after this morning's release of the six monthly six-monthly Financial Stability Report.

New Zealand's biggest bank, the ANZ National, responded to the report by stressing it was strong and well-capitalised.

The Reserve Bank warned that a sharp rise in recent years in agricultural debt levels may not be sustainable with some of the more highly leveraged farms, particularly in the dairy sector, having difficulty servicing debt.

The Reserve Bank said there was evidence of increased use of farm overdraft facilities earlier in the year than was typically the case. He also said New Zealand remained firmly in the grip of the global financial crisis.

Appearing before Parliament's finance select committee after the release of the report, Spencer said while rates had been coming down, the most recent cut to the Official Cash Rate (OCR) had not flowed through more.

The Reserve Bank considered margins being paid on floating rate mortgages were unusually high, and also thought the bottom of the housing market had yet to be reached.

The report said reduced loan growth was likely to depress bank profits, but the impact would be partly offset by increased interest margins.

Spencer told MPs that the Reserve Bank was expecting the number of people defaulting on mortgages and other lending to increase in the coming year.

"Non performing loans will increase from here," said Spencer.

Banks had taken a hit in the form of reduced profits but Spencer said he was not willing to make a judgment on whether it was sufficient or not.

Asked whether it was right that a private company should insulate its profits margins at the expense of the real economy, Spencer said banks should take their share of the pain.

Despite this, it was essential the banks remained profitable in order to maintain the stability of the system.

"It is a balancing act," said Spencer.

The ANZ National bank's response said it agreed that "maintaining system stability is of utmost importance as we navigate through what is a very difficult environment."

It said the bank had "strong liquidity and funding, and is well capitalised, over double the minimums required by the Reserve Bank."

ANZ National, it said, and its parent, the Australian ANZ group was one of only 10 banks left in the world with a "AA" credit rating from Standard & Poor's.

"As also reported, the Bank has taken the prudent step of increasing its credit provisions for its New Zealand operations by $498m since March 2008 and we expect provisions for the full year 2009 to be more than double those of 2008. Write-offs remain relatively low to date."

"We're seeing some very positive results with our customer assistance programme established last year specifically to help customers manage unexpected decreases in household incomes," the statement said.

"As New Zealand's largest rural lender, we are committed to supporting our customers with their financing requirements and we're working closely with farmers to make sure funding is appropriately structured. Losses in the rural sector are low."

The Reserve Bank's Grant Spencer said that rural land prices were also likely to come under increasing pressure through the rest of 2009, with the market for farm sales currently "very thin".

Despite some more positive trends in dairy prices recently, it appeared unlikely that commodity prices would return to the elevated levels of 2007/08 in the foreseeable future, the Reserve Bank report said.

Banks should be prepared for a situation in which farm incomes remained relatively low for an extended period.

"Prompt action to carefully manage exposures to financially stressed farms is likely to be necessary."

Bank lending to the agricultural sector more than doubled in dollar value between 2003 and 2008, and continued to grow more strongly than lending to other parts of the economy, although growth rates had eased in recent months.

Loans to agriculture now accounted for 15 per cent of total bank lending in this country, up from 10 per cent earlier this decade, the report said.

At the same time, it also noted that default rates on agricultural lending were relatively low for now, with the major banks having indicated they intended to help rural borrowers through a period of weaker returns.

New Zealand continues to be firmly in the grip of the global financial crisis, the Reserve Bank also confirmed.

"Major government interventions have eased stresses in the international credit markets, but the adverse second-round effects of the financial crisis on global economic activity and commodity prices will take some time to play out," said deputy governor Grant Spencer as he released the report.

"These global pressures are encouraging a recovery in household savings which should contribute to an improvement in New Zealand's external balance over the next few years. Recent monetary and fiscal policy measures will help to ensure that the adjustment to more sustainable debt levels is an orderly one.

"The banking system has continued to lend to households and businesses over the past year, but credit growth has slowed in recent months, lending criteria have tightened and some businesses are reporting difficulties in obtaining credit. While current conditions warrant caution, it is important that the banks continue to lend to creditworthy borrowers."

Spencer said New Zealand has been fortunate that its banking system has not experienced the distress seen in some countries. However, while the overall asset quality of the banks remains strong, impaired assets have increased sharply since late last year.

"Provisioning is expected to rise further over the year ahead as business profits weaken and unemployment rises. Banks must ensure that they make adequate provisions and maintain capital levels sufficient to absorb further unexpected losses."

New Zealand banks, he said, remain vulnerable to external financial shocks as a result of their dependence on offshore borrowing. Conditions in the funding markets had improved since late 2008 and one bank had issued offshore term debt using the Government's wholesale guarantee.

Spencer added that banks need to lengthen the maturity structure of their funding to reduce their vulnerability to offshore market disruptions. The Reserve Bank's new prudential liquidity policy, to be released around the end of May, will help to reinforce this objective.

Lending by the non-bank sector is continuing to contract, despite the easing of liquidity pressures as a result of the Government's Deposit Guarantee Scheme.

Asset quality has continued to deteriorate as a result of the economic downturn and the weak property market in particular.

In the medium term, higher standards across the non-bank sector are likely to be reinforced by the new prudential regime, which the Reserve Bank is currently implementing.

Assessing and countering potential threats to financial stability in New Zealand will remain a high priority for the Reserve Bank while the effects of the global crisis persist, Spencer said.

- NZPA, with NZHERALD STAFF