Reserve Bank final capital review decisions
The Reserve Bank released its final decisions around capital lending at the beginning of the month. Market commentary around this varies, but it is certain that bank lending margins will need to increase if the big four banks maintain their return on equity ratio. Financial commentator, Gareth Vaughan, gives his opinion here: https://www.interest.co.nz/opinion/102918/gareth-vaughan-says-should-proverbial-hit-fan-public-regulator-and-regulated-banks.
At Finance New Zealand, we’ve made a few notes around things that may affect our clients. For instance, indications are that capital impacts are not spread evenly across products within the banking environment. Those products that are deemed riskier require a higher amount of capital allocation, and some products have historically had lower returns on equity than others. It is apparent that the banks are, in general, limiting the growth of their business, commercial, and corporate lending books. While they will continue to support their existing customers, we are seeing four main impacts:
- The main banks being much more selective on new to bank transactions, unless the credit profile is very strong. For example, bank appetite in the commercial property development sector has tightened further, and rural lending is much harder to obtain.
- The big four banks have already made some margin grab – they have not passed on all wholesale and official cash rate reductions over the last six months.
- At the same time, the Royal Commission in Australia is having some impacts on front line banking staff here. Individual key performance targets for front line bankers have moved from dollar based metrics to softer ‘customer outcome’ metrics. These same staff are facing credit requirements that, particularly in the small business channels, require much deeper analysis of individual capacity to service debt. While, in itself, this shift is not unjustified, the result is that it is harder to obtain funding for many deals from the main trading banks. We are finding it more important that the right people are involved in a transaction, as having a banker with the right level of experience makes a big difference in the deal outcome.
- Appetites remain strong outside the four main banks. For example, first tier asset finance specialists are becoming, relatively speaking, more competitive, and non-bank funders are picking up an increased share of the property development market.
In this climate, the diversity of funding options we have at Finance New Zealand means we should be able to find a finance solution that works for you. We have close working relationships with both bank and non-bank funders so are sure to find a lender with an appetite to fund what you need, under terms that are most appropriate for your business’ needs.