PwC sees no signs of a turnaround in falling bank lending to business

Lending by the major banks to businesses is likely to continue declining with nothing obvious poised to turn the situation around, according to PricewaterhouseCoopers (PwC) partner Sam Shuttleworth.

Shuttleworth spoke to interest.co.nz after the release of PwCs’ third New Zealand Banking Perspectives report, The report notes a “dramatic” 6% decrease in business lending in the six months to March. And Reserve Bank data for July shows total business borrowing at the end of July of NZ$72.2 billion, down 7.4% year-on-year.

Shuttleworth said business lending was down because;

1) Companies themselves aren’t necessarily taking on business investment activity, therefore reducing borrowing demand.

2) An increase in corporate bond offers. This diversifies a firm’s funding bases and is typically used to retire bank debt. An example of this is a bond issue by Greenstone Energy, the holding company of the Shell New Zealand fuel retail and distribution business, which is looking to raise up to NZ$200 million to repay some of Greenstone's NZ$350 million worth of bank debt with ANZ, BNZ, HSBC and Westpac.

3) Borrowing money costs more because the banks themselves are paying more for their funding and this “cycle continues.”

“I can’t foresee anything that will change this immediately,” Shuttleworth said.

And further reductions in corporate borrowing were expected during the second half-year as deleveraging continued.

This is despite at least one major bank, BNZ, saying it has recently eased its credit criteria for small business customers by “easing how we use the customers' financials to evidence how they can meet their commitments to us.”

The bank said the move has seen it shift from a position of declining 65% of loan requests from small businesses to approving more than 65%.

However ANZ, the country’s biggest bank, doesn’t plan to follow suit.

The PwC report covers the first-half of the 2010 financial year for ANZ, ASB, BNZ, Westpac and Kiwibank. ASB and Kiwibank’s ended in December 2009, and Westpac, BNZ and ANZ at March 31 this year.

Retail deposit scrap

PwC notes the banks continue to fight hard for retail deposits. Despite total system growth in household deposits showing the lowest six month growth since the dot-com bubble burst, the banks grew their share of the deposit market more than system growth as a whole, due to “flight to quality” and aggressive pricing.

PwC says the five banks gobbled up NZ$4 billion of funding from retail customers during the period. At NZ$1.56 billion, Westpac raked in the most, closely followed by Kiwibank with NZ$1.47 billion and ASB with NZ$1.16 billion. BNZ attracted NZ$676 million of fresh retail deposit money, but ANZ went backwards, shedding NZ$661 million.

“What we’ve seen in the last year is the retail deposit rate has actually been at a premium to the Official Cash Rate (OCR),” Shuttleworth said. “If you looked back three years it was the other way around. What will be interesting to observe is how much of that premium will continue going forward, especially if there are further OCR increases,” he added. See all bank term deposit rates here.

If there were further hikes to the OCR, the expectation might be that margins contract.

"However, you’re then dealing with competitive forces and one or two banks have higher blackboard rates. Competition is always good for the end user.”

The major banks are all fighting hard for term deposit money because of the introduction of the Reserve Bank’s core funding ratio (CFR) on April 1. Under the CFR banks must source at least 65% of their funding from retail deposits and bonds with durations of at least one year. The central bank wants to increase the CFR to 75% by mid-2012 to offset New Zealand banks’ reliance on international wholesale, or 'hot' money, markets before the Global Financial Crisis (GFC).

“This form of funding will remain attractive to the banks and if, and when, the CFR is lifted (as) this will continue this pressure and competitive environment,” said Shuttleworth.

“It’s good for those who are relying on savings related income.”

'Intense competition'

In a sign of the times ASB introduced a new policy from July 1 whereby it will now accept term deposits from a single customer worth up to NZ$10 million. Previously the maximum was NZ$250,000 per individual deposit.

Against this competitive domestic funding backdrop, the banks are also paying up for international wholesale funding.

ANZ CFO Nick Freeman recently told interest.co.nz wholesale funding costs were driven between 100 and 125 basis points higher by the GFC. This year’s Greek debt crisis then drove them another 50 basis points higher. And Shuttleworth doesn’t see this coming down anytime soon.

“It’s a supply and demand issue. There are high levels of demand for wholesale funding so market forces suggest what we’re experiencing now will continue.”

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