Interest.co.nz spoke to Kiwibank CEO Steve Jurkovich about mortgage repayment deferrals, a slower property market, taxpayer-underwritten business loans, the Reserve Bank banning bank dividend payments, the prospect of bank CEO pay cuts, and the Reserve Bank's efforts to support bank liquidity.
Check out the video recorded on Thursday afternoon.
Kiwibank CEO Steve Jurkovich says banks are being “open-minded” when considering taxpayer-underwritten business loan applications.
“We will be more liberal, because what’s normal in this circumstance?” he told interest.co.nz, recognising the fact some businesses that are shut now, could be back up and running as usual after lock-down.
“Human needs don’t really change,” Jurkovich said.
However, he recognised the complexities weighing up which businesses are truly “viable” in the current environment.
“It’s going to take weeks sometimes to make these decisions, so I know that will be frustrating for customers, but that would be a very very long queue at a government department [if it was handling applications].”
The Government, under its Business Finance Guarantee Scheme, has agreed to underwrite 80% of eligible COVID-19-affected business loans to encourage banks to keep lending.
Asked what he makes of this arrangement whereby the government is effectively co-opting banks to help it determine which businesses will survive COVID-19, Jurkovich said that banks are best placed to make those decisions.
“We’re in the business of managing risk… we have to live up to it…
“I think the actions from the Government and Treasury and the others to get things going and make bold moves is great, but I think it’s just the start…
"Coming out of it might be more of a wicked problem than going into it in terms of a lock-down.”
Bank CEO pay cuts a 'realistic request'
Jurkovich said the Reserve Bank’s (RBNZ) move to bar locally-incorporated banks from paying dividends “until further notice” or until “the economic outlook has sufficiently recovered” is sensible.
“If we are going to have Crown support for liquidity and to support customers, then it makes sense that there would be restrictions for where that money can be paid to.”
Asked whether as long as taxpayers are backing banks, their CEOs and directors should also be taking pay cuts, Jurkovich said: “I don’t think any industry is going to be immune from that conversation.”
He was “certainly open minded” to the what he coined a “realistic request”.
However Jurkovich pointed out that banks are playing their parts.
The $6.25 billion government underwrite being provided is equivalent to 5% of new business loans written by all registered banks in a year.
He also pointed out that the government underwrite would be called up as a last resort.
“The banks will take all their usual procedures to try to realise security, and then if there’s a loss, the government will step in.”
Jurkovich acknowledged that excluding dairy, bad debts have been low over the past five years.
“It is not abnormal that banks would have to swallow more of the losses during the cycle and I think that’s what we’re facing in to. We’re all preconditioned to bad debts being down below 1%... so that is a big big change for shareholders to think about.”
A 'very high percentage' of mortgage deferral applications being approved
Turning to mortgages, Jurkovich said Kiwibank had approved a “very high percentage” of the 4000 mortgage deferral applications received by Thursday afternoon.
The RBNZ has loosened some capital rules to support banks providing six-month mortgage repayment deferrals to customers whose incomes have been affected by COVID-19.
Jurkovich recognised that with interest continuing to accrue during the six-months, deferrals weren’t suited to everyone.
Asked how concerned he was about New Zealand’s high level of mortgage debt, he said: “Overall I’d say, not that worried at the moment. But certainly a great question around how long this goes on for and how do we come out of it…
“The high LVR [loan-to-value ratio] loans certainly are more vulnerable… if you were to go through a prolonged downturn.
"Serviceability is really the key issue. [For] people earning, the LVR and the daily price of your property is probably not that relevant. If you’ve got somewhere to live and that’s the home that you want to be in… and you’re not trying to sell it, actually the price of it is not so important.
“In a forced sale situation, there are definitely some consequences.”
What will we do without rising property prices?
On a higher level, Jurkovich questioned whether we were entering an age where we would have to start thinking differently about debt.
“If you’ve been buying property on the idea that capital growth would come your way, you’ve got to wonder about that for the next few years.
“I think that does emphasise the point that actually debt reduction and serviceability and personal financial management is probably going to come to the fore much more than it did previously.
“A rising property price certainly helped a few people out. And if there’s not rising property, then I think we all need to think about actually, are we going to borrow to buy those discretionary items or are we going to try to repay some debt."
Liquidity not a problem at the moment
Jurkovich said Kiwibank is yet to really take the RBNZ up on its offer to the banking sector to provide more liquidity.
The RBNZ has launched a Term Auction Facility whereby it’s offering banks loans with three, six or 12-month terms. It'll set up a similar facility in May to provide loans with three-year terms to support bank lending under the Government's Business Finance Guarantee Scheme. It's taking government bonds, residential mortgage-backed securities, and other bonds as collateral.
“Banks have spent decades organising themselves so that if the markets dislocate or stop, then we’ve got enough money in the tin to keep trading. At the moment, there’s probably no issue in liquidity,” Jurkovich said.
“And actually, what you’re seeing is a whole lot of people moving to term deposits and savings with banks because they see the safety and security of a bank deposit versus some of the other market alternatives…
“That liquidity comes into the bank and it means that you don’t need to go into the wholesale markets, because retail customers are giving you their deposits and trusting you with that.”
Jurkovich supported the loan facilities being provided by the RBNZ, saying that come July/August, Kiwibank might take these up.
“It could be attractive and we don’t want to wait until the last minute because there’s no guarantee things get better before they get worse…
“Most banks will be thinking about it at the moment, but wouldn’t expect too much on the buyer’s side at the moment.”
22 Comments
We could have just stood back and watched what happened?
But, getting out of this might be easier than even I thought! Just keep the borders closed to everyone, and anyone who comes back in ( someone who's already left and wants to come home) has to have a 4 week holiday up at Whangaparaoa at their own expense?
Good on Steve for fronting, when the big four have gone to ground.
My moneys with Kiwibank, only for the reason if any bank is to be saved by the government it will be this bank.
I like Steve's optimism, however the reality will be that some businesses will not recover; nor will the pay checks of most executive positions.
Having been through 3 (now four) crashes, its going to take time to play out (as banksters) weed out the bad loans slowly (a rush would see a much faster collapse). History has shown sharemarkets collapse first (well at least their collapse is far more transparent), followed by the commercial property market, then the residential market. The reality is they all collapse at the same time, by independent advisors (most lacking full understanding) largely employed for bank requirements soften the curve of decline.
This will leave alot of people in negative equity positions, and thankfully see the end of the unregulated property syndicates party; unfortunately at the expense of those niave enough to buy into their high short term returns. Mark my words, a number of these property syndicators will be finished, and head for the hills. (remember Waltus anyone?) High value residential real estate will also take a big hit, as keeping up with the jones will be caught with their pants down.
The positive to this correction will see a reallocation of capital to real growth assets and risk priced appropriately, rather than the ponzi scheme of property, and deliver a better medium term outcome for the masses.
Buckle in for a very bumpy ride over the next two to three year period.
“We’re in the business of managing risk… we have to live up to it…
I wonder if he's speaking for Kiwibank or the banking sector at large. If the NZ banking sector is in the "business of managing risk", then why is 70% of their business focused on issuing mortgages? Alongside Australia, this is unparalleled globally. Furthermore, more than a few credible people would say that the housing bubble is out of control or putting the whole economy at risk in NZ. I haven't heard any reasonable response from the NZ banking sector to explain why that isn't the case.
The issue in my view has been a lack of diversity in revenue streams overall and not just within loans/liquidity. How many banks generate significant revenue from non-credit products and services? (e.g. Payment mechanism, Portfolio management, Advisory services etc.)
Easy money on the way up and a case of we haven’t really thought about going wrong, on the way down. NZ and Australia are diffrunt we were fine in the GFC - 10% drop was it.....If there was a problem no worries, we’ll just steal our customers deposits. There won’t be a run on the banks because they won’t know until we’ve nicked it!
Good interview.
No talk about compressed bank margins in low rate environments? We have seen that in Japan and Europe banks are hesitant about lending in such environments because the risk (i.e bad debts) need to be exceedingly low for such deals to be profitable. Banks have not been spared economic strife elsewhere.
No Banks in NZ actually bet as much and as high as ANZ/JK/Zollner/blue team.. about any Govt. actions to 'stabilise RE industries' & rosy Outlook when dealing with China 'restarted economy'.. (none of them expect the 2021, worldwide blowback towards China).. but what do you expect? same as NZHerald, you only need to dig shallow.. to find who's backing this A/blue bank. That's why the rest of NZ banks including Rabo, blowing different trumpet sounds not as much about 'selling lands' & put all business deal in one China basket. Remember those blue team during JK & the rest, their personal/family business affiliations, 'investment visits', JLR cases etc. - NZ wake up, there's another non-A/blue band out there! - you've been warned ;-)
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