Business and farmers are struggling to get loans from housing-mad banks

Wednesday, 27 September 2023

Banks have been tilting their lending towards household mortgages, and away from loans to businesses and farmers.

The big banks are so housing-heavy, less than 30% of their loans are now to businesses or farmers.

The figures, revealed in KPMG’s Financial Institutions Performance Survey, do not bode well for the economy, and our collective future wealth, says independent economist Cameron Bagrie.

KPMG’s report shows just $30.70 of every $100 from the biggest eight retail banks is a business or agricultural loan, continuing a multi-year shift that could worsen, if predictions of the housing market taking off again after the general election are proved correct.

“We’re trying to get richer by trying to sell more expensive houses to each other,” Bagrie said.

“That’s just not a sustainable path to prosperity.”

Access to credit for businesses was a really important component of economic development, and how the economy performed in the next 10 to 20 years, Bagrie said.

Commerce Commission probe into retail banking competition

The report showed the banking sector increased profit after tax by 12.7% in the three months to June 30, up to $1.74 billion from $1.54b.

Its release came just days after the publication by the Commerce Commission of big banks’ submissions to the market study into competition in the retail banking sector, ordered by the Government.

In those submissions the four big banks claimed they were not making excessive profits compared to banks overseas.

However, KPMG’s figures showed a disconnect between the banks and the economic conditions that have put houses and businesses under pressure.

Banks increased profits were partly a result of the banks reducing their expectation of losses on loans as unemployment remained high, KPMG’s report showed.

But they were also partly the result of banks being able to maintain, or increase the margins between the interest rates they lend money at, and the amount they pay their depositors.

First Union said the Reserve Bank Te Pūtea Matua’s raising interest rates to keep inflation under control had created “bankflation” for households, and helped bank profits surge.

“NZ banks’ net interest margins – the difference between lending and borrowing rates – are now at their highest level in 17 years,” the union said.

Economist Cameron Bagrie says, “We’re trying to get richer by trying to sell more expensive houses to each other.”

Bagrie lamented the Government’s decision to leave small and medium business banking out of the Commerce Commission market study.

He said banks had favoured household mortgage lending, and moved away from productive business lending, and part of the reason was that Reserve Bank capital requirements meant mortgage lending was far less capital-intensive for banks.

It was a long-term issue politicians vying for power on the election trail had been silent on, Bagrie said.

Despite lending to business making up a small proportion of their lending, it made up an outsize contribution to their profitability, he said.

Often small business loans were secured against business-owners’ homes.

Bagrie is not alone in lamenting the exclusion of small and medium-sized business lending from the market study.

Federated Farmers told the Commerce Commission it was time for a market study into rural lending, where loans very often also covered farmers’ homes.

Farmer satisfaction with their relationship with their banks continues to slip, Federated Farmers said, and just under a quarter said they had come under “undue” pressure from their banks in the six months up to May.

Big bank net promoter scores among business customers.

There are indications businesses are unhappy with their ability to get bank loans.

ANZ’s survey of whether businesses expected loans to become easier to get, remained firmly mired in negative territory.

The big bank net promoter scores also remain firmly negative among their business customers, compared to positive score for retail customers.

Leann Watson, chief executive of the Canterbury Employers’ Chamber of Commerce, said access to finance was always among the top concerns of business owners in its business confidence survey.

The only reason it did not appear in the top five concerns on the chamber’s latest survey, released on Monday, was that “mental health and fatigue” leapfrogged it into 5th place, behind inflationary pressures, low consumer confidence, a tight labour market, and increased compliance costs.