What happened Wednesday

A review of things you need to know before you go home Wednesday; BNZ cuts RapidSave rate, business confidence even higher, online retail spending growth slows, financial system 'sound', swap rates fall, NZD rises

31st May 17, 3:59pm by David Chaston

Here are the key things you need to know before you leave work today.

MORTGAGE RATE CHANGES
No changes to report today.

DEPOSIT RATE CHANGES
BNZ have cut -15 bps from their RapidSave bonus saver, taking the potential rate down to 2.20%.

ADMIRABLE EXPECTATIONS
ANZ economists have been trying to send cautionary signals about the economic outlook, but businesses in their 'Business Outlook' survey haven't got the message yet. That survey shows business confidence lifted even higher in May. The broader survey gauges are all very positive on the outlook for the economy, pointing to 3½-4% GDP growth. And inflation expectations in this survey have finally hit 2%.

CONSOLIDATION & UPGRADE
Silver Fern Farms has confirmed today that it will close its loss-making Fairton sheep processing facility in Mid-Canterbury. With that drain plugged, it has committed to a capital expenditure program in its other facilities of $22 mln this year, and $20+ mln/year in later years. These levels are more than double the levels than before the Shanghai Maling shareholding was in place.

THE SHIFT ONLINE
The growth in online retail spending eased in April, but was still up +9% compared to the previous April. The growth rate softened for both offshore and local online purchases, compared to 2017’s trends so far. Purchases from offshore online retailers were up +13% on April last year. Spending at local online retailers was up +6% on the same basis - the lowest annual growth rate since late 2015. Online grocery purchases grew strongly however, mirroring international trends.

'SOUND, BUT WITH RISKS'
The RBNZ has been talking about 'financial stability' today, and the focus is mainly on the housing markets. We have reviews of their Report here, here and here. They also had warnings for insurance companies.

UNINSPIRING
In Australia, main bank NAB analyses its data on spending patterns by its customers and that shows a relatively weak situation getting weaker. Spending on consumption-based goods and services in the year to March 2017 slowed to +2% versus +3.1% in the year to December. This is based on about 4 mln daily transactions. Average monthly spending fell to AU$1,997 in metropolitan areas from $2,171 in the previous quarter. It was lower in regional areas.

WHOLESALE RATES LOWER
Local swaps rates have fallen today by -3 bps across the board. The 90 day bank bill rate is unchanged at 1.97%.

NZ DOLLAR FIRM
After being well above 71 USc most of the afternoon, the Kiwi dollar has just fallen under than level now. On the crosses we are at 95.2 AUc, and at 63.5 euro cents. The TWI-5 is now at 75.4.

You can now see an animation of this chart. Click on it, or click here.

Daily exchange rates

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Source: RBNZ

Source: CoinDesk

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28 Comments

by sharetrader | 31st May 17, 4:10pm 1496203843

Banks going after savers to improve margins now?

by TainuiBabe | 31st May 17, 7:39pm 1496216358

At first glance it would appear that way to the general public, but given the fact that the banks have openly stated that their offshore funding has in fact been reduced due to the higher risk rating given to our Australian parent banks, they have been forced to seek out local money from local investors to keep up with the lending demand from customers looking to purchase houses. So one way of attracting more term deposits in the local market is to make the savings accounts less attractive by reducing the interest rate, because savings accounts are short term and balances fluctuate considerably in these accounts. So the aim is to encourage customers to move their savings into Term Deposits for a longer term and lock them in. It is an interesting side note that Term Deposit growth is what the banks use to measure how much money they can then on-lend to home buyers, usually at a margin of 10 times the initial term deposit. For example $10,000 loaned to the bank by a Term Deposit holder will be lent out to a FHB at $100,000. That is what Fractional Reserve Banking is.

by TainuiBabe | 31st May 17, 7:43pm 1496216593

Also, if you would rather preserve your capital during a bank run, it is the Shareholders and Term Depositors who are targeted first and their money is used to recapitlise the banks. Money held in bank savings accounts aren't completely safe either, but they get hit last.

by MisterB | 31st May 17, 8:42pm 1496220150

Source for this assumption please? Under OBR, shareholders are first, then all other unsecured creditors (incl depositors) are treated equally.

I think you'll find TD preference is down to Core Funding Ratios by RBNZ
http://www.rbnz.govt.nz/regulation-and-supervision/banks/prudential-req…

"The basic notion underlying the CFR is a comparison between an estimate of the funding of the bank that is stable and can be assumed to stay in place for at least one year (‘core funding'), and the core lending business of the bank that needs to be funded on a continuing basis."

by TainuiBabe | 31st May 17, 8:48pm 1496220514

Looking at the RBNZ website on their OBR policy, I agree with your statement that Shareholders and Term Depositors are hit first, and the rest of it is unclear as to "Savings and Transaction Accounts" being included. It all depends on how much trouble the bank is in at the time. But to be clear from a "Banking" perspective, if you read your banks "Terms and Conditions" which is presented to you on making your first Term Deposit, it clearly states the risk, although it has been low in recent decades, it is becoming more of an actual risk these days. Basically, you get higher interest rates for higher risk and savings accounts are classed as lower risk but not completely safe.

by MisterB | 31st May 17, 9:15pm 1496222103

I didnt say "Shareholders and Term Depositors are hit first" ... it goes shareholders then all depositor. Savings or Term deposits.

"The OBR policy is designed to ensure that first losses are borne by the bank’s existing shareholders. In addition, a portion of depositors’and other unsecured creditors’ funds will be frozen to bear any remaining losses"

It makes no difference if it's a TD or a Savings account under OBR.

It does make a difference for Core Funding Ratios

by TainuiBabe | 31st May 17, 11:21pm 1496229667

Mister B, this is one example of an article I believe was published today about most of our banks funding being derived from offshore.... https://www.interest.co.nz/personal-finance/88038/rbnz-says-significant…

by MisterB | 31st May 17, 11:43pm 1496231002

Thanks for the share. But it doesnt say most.

It says exposure is increasing
refer : http://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Financia…

Over last 4 years Offshore wholesale funding as a percetage of growth has increased to 30% ... now don;t get me wrong, I am not saying that's not a worrying trend ... but just correcting your assumptions that most is sourced there.

"Bank Funding Pressures" Section is a "good" read ;) . Actually explains competition for deposits - $45b in offshore rolling over in the next 3 years will need to be replaced, and there's a desire to be less exposed.

Edit: Incidentally, this is how you manage to reconcile the ~$400b in lending with the ~$300b in local deposits, leaving $100b offshore. Not small, but not most, and certainly not a majority. PS Im pretty sure they dont rock up to Bank of A and ask for money, it's just that the Fed rate drives market sentiment/how much yield people want, and there are always international placements out there.

by MisterB | 31st May 17, 8:39pm 1496219975

If that were true, why does RBNZ figures show Reg Banks hold $309b in deposits and $410b in loans and advances. If your 10x was true, wouldnt it be only $41b in deposits?
http://www.rbnz.govt.nz/statistics/s10-banks-balance-sheet

by TainuiBabe | 31st May 17, 8:55pm 1496220900

No because most of our banks funding is from offshore banks, because New Zealanders are very poor savers, hence why the real figures aren't reflected in our RBNZ statistics. Most of the funding is sourced from banks in America which is the reason why our Bank interest rates increase when the US Fed pushes up their rates. It explains why our OCR set by our RBNZ has little to do with our Banks increasing their rates outside of their rate changes. The fact is that most of the money has come from offshore banks and therefore NZ is at the mercy of the Global interest rates which at the moment is still set by the US Federal Reserve.

by MisterB | 31st May 17, 9:09pm 1496221781

That's just simply not true. There's plenty of articles on here and stat reporting from RBNZ that shows the majority is locally funded. That's why there's a fight for TDs. Your posts contradict each other.

For example - refer to Household Funding - http://www.rbnz.govt.nz/statistics/s40-banks-liabilities-deposits-by-se…

by TainuiBabe | 31st May 17, 9:14pm 1496222071

Apologies but I do think that you may be wrong with the information you have. MOST of our banks funding is raised through offshore banks. There has been untold articles about this situation explaining this for a very long time. ANZ's David Hisco has reported this many times in several articles over the past few months, which is oddly rare for a bank insider in his position to raise alarm bells.

by MisterB | 31st May 17, 9:20pm 1496222427

All I am doing is reading the RBNZ stat returns (s40)

$62b in Transaction Accounts, $88b in Savings accounts, $160b in Term deposits - That's $310b. Of that only $30b is non resident. These are core deposits.

The driver of offshore markets is the hedging - to match the length of lending to the length of deposits. Funding is still onshore largely.

Hisco last commented that NZers need to save more, to fund the mismatch between Household Deposits and Household lending.

by TainuiBabe | 31st May 17, 9:40pm 1496223649

Yes you are correct that David Hisco has told New Zealanders to invest in Term Deposits, because the banks need LOCAL deposits BECAUSE their offshore funding has been cut. And to keep up with home loan demand, banks NEED more funding and because they aren't getting any more out of their offshore banks, they NEED to encourage local New Zealanders to invest in their Term Deposits so they can continue to lend in an increasingly risky bubble market. No thanks. I am saving small parcels of money and distributing it throughout several banks just in case one bank hits the wall.

by MisterB | 31st May 17, 10:47pm 1496227627

Do different people have access to your log on? One moment you say banks don't need deposits because of fractional reserve, then they don't need them because most money comes from USA .. now, they do need them. Sigh.

by TainuiBabe | 31st May 17, 9:16pm 1496222175

There is most definately a fight for TD's going on between the banks, because their offshore funding has been cut!

by Yankiwi | 31st May 17, 9:28pm 1496222895

This has been true for a while. It has been fun calling up and negotiating "discretionary rates" with various banks in the past year. A year ago, there was little flexibility, you might get a tenth of a percent if you were persistent and found the right bank that wanted to negotiate. About six months ago the discretionary delta started to increase considerably. The last 5 year TD I negotiated had about a quarter percent margin over the advertised rate.

by Tom Joad | 31st May 17, 9:03pm 1496221403

The question you should be asking is how much of that $309b is bank manufactured "money" and how much is savings.

When a bank creates a loan it deposits the money for said loan into the borrowers account. This is created by a few keystrokes at the bank. If the loan is to buy a house the money is transferred from the borrowers account to the sellers account i.e. it remains as a deposit in the banking system.

Banks are not just intermediaries between savers and borrowers - they create money. The Bank of England understands this well and has published a paper on it. It's a shame a few more Central Bankers don't get it.

by MisterB | 31st May 17, 9:11pm 1496221872

The depositors can still withdraw the $309b and spend it somewhere, causing a transfer ....

by TainuiBabe | 31st May 17, 9:17pm 1496222251

I do agree with you on this.

by Tom Joad | 31st May 17, 9:59pm 1496224786

But in the modern economy it still ends up back in the banking system as deposits - this time in the account of the businesses where the money is spent. It will only leave the banking system if it is drawn out as cash or tranferred outside core NZ banking e.g. to an overseas bank.

In the example start with $10,000 of savings in the bank. The bank lends $100,000 on the strength of that. The seller of the house receives a deposit of $100,000 into their account. There is now a loan of $100,000 and deposits of $110,000 within the banking system.

by TainuiBabe | 31st May 17, 10:41pm 1496227260

In a healthy market this is true. But sentiment is changing and Banks are no longer lending on past ratios. It is no longer a sellers market because banks have been forced to pull funding towards new home loans, in particular investors and FHB's which has a flow on effect for everyone. Putting it simply, "You can't derive blood from a stone". The stone has a finite amount of resources, mainly being low wages in an environment which is completely detached from house values. The game is over for now.

by MisterB | 31st May 17, 11:18pm 1496229497

by RickStrauss | 31st May 17, 10:15pm 1496225722

Probably trying to split the load between savers and borrowers, lest the borrowers fall over.

I see Heartland has upped their rate on their accessible savings account though.

by Cowpat | 31st May 17, 4:26pm 1496204787

A monthly close AUD/NZD below 1.05 will see downtrend continue

by Ralph | 31st May 17, 7:44pm 1496216669

So once online retailing has destroyed the bulk of strip shops and malls what will we do with the leftover real estate?

Housing perhaps?

by RickStrauss | 31st May 17, 7:48pm 1496216936

This will be another sign of our success. It's a good problem to have.

by TainuiBabe | 31st May 17, 8:15pm 1496218535

There might not be many houses left over if US Hedge Funds buy them up and rent them out. That is what happened in the US and it kept the house prices elevated while rents were increased to offset any losses. Given the fact that our housing market is open to the global community, it is a real possibility. There was an interview on 60 minutes in Australia about a year ago about Jonathan Tepper, a US Hedge Fund Manager who is waiting to short the Australian market. Link here.. https://youtu.be/roNbsqxemyI