Bernard Hickey: Credit where it's overdue

The Listener magazine published a front-page article last week titled: "Bankers! How Aussie banks are squeezing Kiwis". As is often the case, the headline was much stronger than the article underneath, which was more balanced and useful.

But in the spirit of catchy headlines and a bit of pop analysis of our current banking system, here's my top 10 split two ways.

Five reasons to thank our Aussie-owned banks

1 Our Australian-owned banks (ASB, ANZ National, BNZ, Westpac) are strong, profitable and well-regulated. They currently have tier-one capital ratios at around 8 per cent, which is double the minimum required. That's because they are backed by large and equally well-regulated Australian banks, which are backed by the fantastic A$1 trillion ($1.32 trillion) Australian pension system.

2 The Aussie-owned tag implies they're all run from Sydney and Melbourne, which is not true. They are Australian-owned, but they have their own boards and balance sheets and are regulated hard by our Reserve Bank. Almost all the big lending and product decisions that matter are made in Auckland and Wellington, with the bulk of lending decisions made in the branches by New Zealand managers.

3 Our banks didn't do the stupid things that crippled the banking systems in Britain and the United States. They didn't run investment banks that leveraged themselves to the eyeballs with toxic debt. They didn't pay themselves ludicrous bonuses that distorted their risk-taking decisions. New Zealand's banks, even more than their Australian parents and certainly more than the UK and US banks, stuck to their knitting of simple mortgage and overdraft lending to homeowners and businesses.

4 Our banks are easy to do business with. Anyone who has had a bank account in Australia or Britain will know how much better our banks are. They actually do better in customer satisfaction surveys than their Australian bank parents. In a recent survey by Kiwihost/JRA, banks were rated as having better customer service than any other industry, with telecommunications firms rating the worst.

5 Our banks are competitive. Sometimes it takes a while and the introduction of Kiwibank has helped, but there's no denying our banks are much more competitive than other infrastructure industries with only a few large participants. I'm thinking of the power and telecommunications businesses in particular. Our banks have fought like dogs to win term deposits in the past couple of months and are now working out they have to offer high rates to win the money. They have fought like dogs too in the past to offer very low mortgage rates, often at the expense of profits.

Five reasons to spank our banks

1 They are not offering enough interest rate relief to businesses, particularly medium to large ones. The Reserve Bank has rightly been pushing the banks to pass on as much interest rate relief as possible to businesses. Banks have been concerned about higher risks for businesses, given their income is more volatile and their security is less certain than for wage and salary-earning homeowners. But this caution could easily turn into a self-fulfilling prophecy given the cashflow pressure businesses are under at present.

A single measure of business lending rates is difficult to find, but the Reserve Bank's measure of business base rates show they have fallen just 130 basis points over the time the Reserve Bank cut the OCR by 525 basis points.

2 They are lending too much and too fast to farmers. Farm-lending growth is still running at more than 20 per cent on an annualised basis, despite the slump in dairy prices and the likely bursting of a bubble in land prices. When will the banks take the keys to the bank utes off the farm-lending teams?

3 They borrowed too much overseas on short terms. The banks have broken their own rules about matching the maturities of lending and deposits when they chose to obtain about 40 per cent of their funds on wholesale markets, mostly on 30-90 day terms. They were borrowing short (and overseas) and lending long (and locally) in a big way.

The Reserve Bank, the IMF, the World Bank and the ratings agencies have all warned this makes New Zealand vulnerable in a global financial crisis if credit markets freeze for any length of time.

4 They pumped up the housing bubble with too much high loan-to-value ratio lending. Our banks were not immune from the collective insanity that drove New Zealand's housing market (and the economy) up from 2003-07.

They competed against each other hard, with loans worth 90 to 100 per cent of the value of the property. Near the end, some banks were offering 100 per cent plus loans. The bank lending to property investors was not as aggressive as the lending of some finance companies and mortgage trusts. But it wasn't far off.

5 They cut their term deposit rates too fast and too far. Banks were used to getting cheap funding overseas whenever interest rates dropped here. They could substitute funding from mums and dads in New Zealand with funding from banks and other institutions overseas.

They appeared to think they could do the same again this time around, but found that mums and dads jumped into corporate bonds, guaranteed finance companies and others as soon as the term deposit rates dropped below 5 per cent. The banks are now revisiting that by offering 5 per cent plus rates for longer terms, but it took a while.

* Bernard Hickey is the managing editor of www.interest.co.nz, a website for investors and borrowers wanting free and independent news and information about interest rates, banks, finance companies and the economy.