Money by the numbers - the devil's in the data

Thursday, 6 April 2023

The path back to low inflation - Reserve Bank of New Zealand chief economist Paul Conway. (First published March 23, 2023)

Gordon Stuart is a partner in Chaperon, which helps businesses navigate their dealings with banks. He has a lengthy career working in the banking sector.

All eyes are on the Reserve Bank this week after its shock move to lift interest rates higher than expected. It’s widely predicted the move will push us into a protracted recession. In making its decision on the OCR, the Bank can draw on a huge range of its own data - it is NZ’s second biggest statistician behind Statistics New Zealand. Bank, lending, deposit, and interest rate tentacles go everywhere. The data does not get enough media attention. By poring over its latest data, we can draw some insights about how households and businesses are tracking.

Home loan commitments(borrowing) have almost fallen off a cliff. New loan commitments in February 2023 were $3.8 billion, down from $5.7 billion in February 2022 and an oversized $7.6 billion in February 2021. The finger can be pointed at lower house prices and weak sales volumes in February. Reduced sale numbers reverberate through real estate, and the legal fraternity.

* ANZ reports profit of nearly $2 billion despite effects of Covid-19

Gordon Stuart is a director of Chaperon, which provides services to businesses in their dealings with banks.

* Where does the New Zealand economy go from here?

Deposit growth is sluggish, with a rise in deposits in February of $1.5 billion and annual growth slowed to 2.7 per cent. Term deposits continue to be favoured, rising by $1.2 billion and jumping $17.2 billion in the past six months. Business transaction balances have been falling over the past six months, possibly a sign of working capital pressures.

The yield on bank home loans increased from 4.36 per cent to 4.44 percent between December 2022 and January 2023 and February data will see that rise again. It is a key variable to watch in terms of the transmission of higher interest rates to household cash flow. It troughed at 2.8 percent so borrowers have experienced 160 basis points of cash flow mortgage tightening so far - which is massively below where actual rates have moved. Fixed rate lending has bought borrowers some time. Around $121 billion of owner occupier and $48 billion of property investor loans will refinance in the coming year, almost half of all loans.

There hasn’t been a rush of mortgagee sales but mortgage stress will rise as borrowers come off fixed rates

As a gauge of stress, our Banks are in good shape, non-performing loans (NPLs) stand at 0.4 per cent ($2.36 billion) of total bank loans ($545 billion), almost unchanged since September 2021.

One reason non-performing loans remain low is that many borrowers took advantage of falling interest rates to raise their principal repayments, getting them ahead in their payments. This has bought borrowers some time now interest costs have risen. Some sectors such as dairy farmers have been reducing debt – fast - over the past five years

Business lending

The bank yield on business loans (interest income divided by loans) has risen far more than have residential floating loans. It was 6.7 per cent in January 2023, up 0.2 percentage points on the month prior and up 350 basis points from its July 2021 low. Business borrowers should be keeping a close eye on the rate banks are charging, the security provided, and the implied risk margins.

Lending growth has slowed. Housing related bank lending is up only 3.6 percent on a year ago and non-bank 10.0 per cent on February 2022. However, that masks a clear trend of late with non-bank lending shrinking in the past six months removing alternate credit options to banks. Business lending increased by $480m (0.4 percent) in February 2023 after declining in the two previous months. Commercial property lending which comprises 35 per cent of business lending has also tightened. Agricultural lending is up $49m in February due the annual growth in horticultural lending of 11.9 per cent but this masks a -0.6 percent decrease in dairy lending and there is a lot more debt in dairying. Dairy farmers have been deleveraging for the past years whereas households have been leveraging.

Big businesses continue to be favoured over small businesses. Large business lending increased by $449m (1.0 per cent), however the annual growth rate dropped from 9.8 percent to 7.9 percent. Small to medium sized business annual loan growth continued to decrease from 4.4 percent to 3.7 per cent. Access to credit is a problem we see frequently not just for small businesses, but many in the medium category, both are sometimes referred to as the engine room of the economy.

The bottom line

Bank credit quality remains strong but will turn, and there are signs that slower credit and tighter risk appetites are becoming brakes on an economy.