Prime Movers sector report: Rural banking

By PAULA OLIVER

A major shake-up is looming in the rural banking sector and there is no shortage of eager bankers hoping to capitalise on it.

The National Bank, a mainstay of the rural sector with a lending market share of 37 per cent, has been put up for sale by its British parent Lloyds TSB.

Since buying Rural Bank in 1992, the National Bank has been a major part of the lives of countless farmers across the country.

Its $7.33 billion rural lending portfolio is far larger than any of its competitors and it continues to grow at a rapid rate - rising by $1 billion over the year to June 30.

The National Bank's general manager of Rural Banking, Charlie Graham, says it is business as usual for his team.

But competitors are seeing the potential sale as an opportunity to snare business from the sector's biggest operator.

ANZ and Westpac were the only two suitors to have openly declared an interest in buying the bank. Both made applications to the Commerce Commission for clearance to go ahead, but Westpac has since withdrawn.

Neither are among the top three rural lenders by market share in the country.

The commission will look hard at the rural banking sector in its deliberations because a purchase by ANZ would take its lending market share over 50 per cent.

Rabobank, an up-and-comer on the New Zealand rural banking scene, has been mentioned in some reports as a possible buyer of the rural portfolio.

The Dutch agriculture and food specialist has been growing strongly here since entering an alliance with Wrightson five years ago.

Its takeover of AMP Banking's rural business in May increased Rabobank's lending book to $2.5 billion, and the organisation's growth in Australia is also strong.

It now has a 13 per cent market share in local rural lending - demonstrating it has come a long way from the early days of being mistakenly tagged "Robobank" in some reports.

Local managing director, Bryan Inch, has made no secret of the fact his bank wants to keep growing and would like to get its hands on the National Bank's customers.

He reportedly approached potential buyers of the National Bank to flag Rabobank's interest in the rural portfolio in case a buyer did not want it or was not allowed to keep it.

Asked what Rabobank's position was now, Inch said:

"Obviously from the announcements made by the Commerce Commission, we are not involved in any of the direct applications for the purchase. We certainly see our best opportunity as being customers who want to come and join us."

Inch is focused on establishing new Rabobank branches across the country to meet the growing scale of the bank and to cater for farmers who appreciate a physical presence.

He wants to sell the bank as one with superior global knowledge through its involvement in the food and agriculture sectors.

"We can tell our clients what's happening to world food demand, what's happening to supply, whatever. Farmers are becoming more focused on that kind of thing when they make a farm purchase or decide how to use their land. We bank some of the world's major food processors and suppliers, which gives extremely valuable market intelligence."

In the Netherlands, Rabobank commands close to 90 per cent market share in its chosen areas of specialty.

Inch does not want New Zealanders to think of Rabobank as a discount operator, but rather see its value in knowledge and expertise.

He said it was competitive on price, but "we don't believe we are price setters as far as discount rates go. We've got enough differentiators without buying business."

Rabobank won't be the only operator keen to win from the uncertainty surrounding the National Bank's future - others are also lining up at the farm gate.

ASB has heavily targeted the sector, particularly dairy, and claims to have moved into a clear third position in lending market share behind National and the BNZ.

It is one of a trio of banks - the others being Westpac and Rabobank - that sit around the 13 per cent mark. ANZ is further back on 9 per cent.

ASB's head of relationship banking and financial services, James Mitchell, said the bank had put a lot of effort into getting a presence in the farming community.

He said any disruptive influence in the market would be viewed as an opportunity.

"When there's fallout for whatever reason, we would tend to back ourselves to attract new business. If whoever buys the National Bank is not viewed positively by existing customers, then yes, we would expect to benefit from that."

ASB topped last year's AC Nielson Rural Banking Monitor in the area of customer service - with 85 per cent of ASB customers surveyed saying they were either extremely satisified or very satisified with their bank's performance.

Another closely watching the sale process is BNZ, which holds a 20 per market share of rural lending.

Its Australian parent, the National Bank of Australia, is the leading rural lender on its home turf.

NAB is the only one of the major Australian banks yet to declare its hand, but a purchase that included the National Bank's rural portfolio would take BNZ to almost a 60 per market share - and no doubt ring significant alarm bells at the Commerce Commission.

General manager of Agribusiness for BNZ, Ian Walsh, said the bank was focused on making sure its existing customers were looked after before making sure people knew what the bank could offer.

He said BNZ's strength was in how long it had been associated with the sector, and the relationships it had built in that time.

"There are competitors who come in with a lot of noise, but at the end of the day you need to have good representation up and down the country, longstanding relationships and a commitment to the sector."

Walsh said farmers were quite reliant on the quality of advice and the service they got from a rural banker.

There are many possible outcomes to the National Bank sale process. Lloyds could opt not to sell. An existing player could pick up the bank and attempt to sell the rural portfolio - or be forced by the Commerce Commission to divest all or part of it. Or a team made up of an existing player and a rural specialist could take the bank on in a combined purchase.

Whatever the outcome, the holder will be significantly exposed to the rural sector.

Reserve Bank figures for the month of July showed lending to the agriculture sector was still growing rapidly despite forecasts from some economists that farmers faced a tough year ahead.

Total lending in agriculture hit $19.25 billion, up $700m from the month before.

The continued growth has Massey University senior banking lecturer, David Tripe, wary.

He estimated as much as 70 per cent of the lending was to the dairy sector.

"There is the potential for there to be some risk in this situation," he said of the overall growth. "It suggests banks have been pushing plenty of money into the ag sector despite a weakening of prices in the dairy sector and no immediate prospect of a turnaround in that."

Tripe said there was no guarantee banks would face a crunch, but it wouldn't be a surprise if there were some problems.

He said the sale of the National Bank raised some questions about how a buyer would absorb the rural portfolio.

"I've wondered how comfortable somebody like ANZ might be with absorbing it." The same issues might well have applied to Westpac, he said before the bank's withdrawal.

ANZ and Westpac were the two bottom-ranked banks in AC Nielson's rural customer satisfaction survey last year.

Banks themselves were confident they were not on the path to a crunch in their rural lending. Those interviewed said the extra money was going into existing players, many of whom were looking to expand to counter the falling revenue cycle.

Strong land prices had ensured the borrowing was at a higher level.

Rabobank's Bryan Inch said a downturn would bring out the the best in his bank.

"We don't lend if we don't think it's appropriate. We have deliberately targeted industries like viticulture, horticulture and deer at times when the chips were down and the other banks didn't want to know them. The best of Rabobank will come out when the chips are down and the other banks are shutting up shop and walking away."

ASB's James Mitchell said his bank was well aware of the cyclical nature of the sector and it managed its business accordingly.

"We have been in this for 10 years now. While we haven't gone through anything massive in terms of a downturn, our whole philosophy is 'a customer for life'. We have tried to target good quality business and we have been pretty successful in that."

BNZ's Ian Walsh said the fundamentals behind the growth were solid.

"We're certainly very confident with the business we have written. Farmers are, by and large, pretty good at tightening the belt when they have to. Most of them have seen several of these cycles before."

The National Bank's Charlie Graham said rural lending had started to slow down and that trend would continue. He said the latest cycle was nothing new, and it was important to judge everything in the rural sector with a long-term view.

"You judge these things over perhaps decades rather than five years in terms of people's and organisations' performances. It'll be interesting to see how companies weather through the long cycles."