Memo banks: Tear down interest rates

Don Brash says New Zealand could come under more scrutiny. Photo / Herald on Sunday

Chief executives are not confident that the trading banks are passing through Reserve Bank interest rate cuts to their business customers and the productive sector.

The Mood of the Boardroom survey reveals a whopping 77 per cent of respondents are concerned that the decreases in the official cash rate (OCR) are not being passed through. Just 23 per cent were confident the banks were doing their bit.

The chief executives' response will be music to the ears of the Labour Opposition, which was stymied in its attempt to get a parliamentary inquiry into the issue.

A markets operator was quick to start a bandwagon saying it was time to create a playing field that is neutral to local capital formation. "The biggest win would be a Kiwibank that was strong in corporate, so it was only impacted by the OCR and local term funding, and thus changed the competitive dynamics of the wholesale market as it has done in retail.

"New Zealand Post should spin this off, get an aggressive, commercial chairman and CEO into Kiwibank, and let it really compete."

A real estate company boss said obtaining well-priced commercial funding was the single biggest and more pressing issue facing business in New Zealand. "Not only are the sources of debt as rare as honourable parliamentary ministers, the cost of this debt is increasing in the face of a plummeting OCR.

"The Government must take steps to put more pressure on banks to lower the cost of debt to business and implement more far reaching economic policies to aid businesses in securing the debt facilities.

"If NZ businesses are to survive the recession, invest in future growth, increase the level of employment and investment in technology and establish an industry base upon which the NZ economy can prosper perhaps the powers that be need to establish alternative government-backed funding for businesses."

Other chief executives pointed to the "soundness" of the major banks in the New Zealand market compared to those of other trading partners. "We need strong banks that want to stay in New Zealand," said one. "It's supply and demand. Demand exceeds supply so interest rates have risen," said another.

A majority of CEOs felt the Reserve Bank did not need more tools to deal with the issue. But a sharebroker said it was about time the Government insisted that there is a price to the taxpayer guaranteeing the banks. "Talk of banks being a national asset is silly ... If they were that important they would not be controlled in Australia."

An insurer noted another there was another side to the coin: "The banks have not come to grips that cash is king and that they have to adjust their deposit rates upwards to secure local liquid funds. They are still operating as if they can call deposit rates. They are clipping the ticket at both ends."

Despite the gripes over the interest rate level just 11 per cent of survey respondents report they had had credit lines pulled since the September 2008 financial crash. But Ports of Tauranga CEO Mark Cairns stressed, "Whilst credit lines have not been withdrawn, fees and the approach to corporate risk has changed significantly over the last 12 months."

Westpac Institutional Bank's Andrew Bashford acknowledges corporates face tighter conditions. Bashford advises companies to talk with their bankers well in advance to secure headroom in their lending facilities. "The firms that get caught out have not made sure they have got liquidity and buffer room."

Mighty River Power chief executive Doug Heffernan says the credit crunch has not impacted on the company's expansion plans. "We put in place longer-term bonds three to five years ago when we were looking at development spend."

Heffernan says a bunch of bonds were also rolled over in May last year ahead of the international financial crisis. He notes many Australian banks have since had a reduction in their limits even to good exposures.

The twin impact of the international credit crunch combined with extreme currency volatility has becomes a poisonous cocktail for some highly-exposed exporting companies.

"The exchange rate is all over the scale," says South Pacific Pictures John Barnett. "We receive royalties in forex and can't necessarily hedge, so our income fluctuates. We are a depositer so lower rates means lower income."

But Cooper and Company's Matthew Cockram notes, "It is a great opportunity to lock in funds through interest hedging products ... although the vacillating dollar is a worry to the wider economic outlook."

This sentiment was borne out by agriculture sector respondents like PGG Wrightson's Craig Norgate and Wool Partners International's Theresa Gattung who said extreme exchange volatility was "a real problem."

But there is an over-arching concern. Huljich Wealth Management chairman Don Brash worries the situation might be exacerbated if offshore investors ultimately become uncomfortable with New Zealand's level of indebtedness. Brash - a former Reserve Bank Governor and leader of the National Party - says if there "is a return to extreme risk aversion" New Zealand could come under more scrutiny.