Business loan rates at 33-year highs
Spread between business and home loans ‘appears to have widened’
Business lending rates are higher now than at any time since 1991. The Reserve Bank of New Zealand’s (RBNZ) preferred measurement, the small to mediumsized enterprise (SME) overdraft rate, formerly called the business base lending rate (BBLR), stands at 12.7 per cent, which represents the base interest rate for new overdraft loans for non-farm SMEs.
One medium-sized business owner, who wished to remain anonymous, told BusinessDesk his “overdraft rate is equivalent to 14 per cent and [his] term loans are more or less 10 per cent . . . and then there are transaction fees”.
At the same time, the housing lending rate — or the “floating first mortgage new customer housing rate” — is 8.63 per cent.
The last time it was that high was in November 2008, when the official cash rate (OCR) was 6.5 per cent and the SME overdraft rate was 11.2 per cent.
The disparity came to the business owner’s attention when he found out his daughter, who recently got her first mortgage, was paying “7 per cent or 8 per cent”.
“For business loans, there’s very marginal risk [for banks] because loans for small and medium businesses are invariably secured against a house . . . I don’t think this is right,” he said.
The spread
Massey University banking professor David Tripe said the spread between business and home loans “certainly appears to have widened”.
As to why the gap emerged and has stayed that size from about 2009 is less obvious.
“We don’t actually know nearly enough about New Zealand banks’ business lending.
“There are some arguments for why the gap between loans has grown . . . The biggest one is that business loans are riskier [than previously].”
On top of the global financial crisis, which increased defaults, risk and bailouts, New Zealand adopted new capital frameworks Basel I and Basel II around the same time.
Basel I introduced risk-based capital requirements for banks. Basel II built upon it by increasing the sensitivity of capital to key bank risks.
“The amount of capital required for business loans relative to the amount of capital for housing loans increased,” Tripe said.
“That meant that the effective cost of providing those loans increased because banks had to provide relatively more capital than they had previously.”
The RBNZ 2019 decision, made under current governor Adrian Orr, to require the big four Australianowned banks — ANZ, ASB, BNZ and Westpac — to raise the capital they hold from 10.5 per cent of their loans to 18 per cent, may compound this, “but it won’t be as much as the effect in 2008”, Tripe said.
Former ANZ chief economist Cameron Bagrie said the regulatory setting encouraged the banks to “lean more” into the housing market.
“When the Reserve Bank decided to tell the banks ‘you need to hold more capital’, what the banks did was started lending more and more into the low-risk weighted area of the economy, which is the housing market . . .
“It was a bit of an own goal.” New Zealand Banking Association chief executive Roger Beaumont agreed capital requirements may have contributed to banks increasing their focus on residential mortgage lending relative to business loans.
“Our banks currently hold around $60 billion in capital. That investment is essential to banking in NZ and, to maintain that investment, their owners need a return. The banks’ return on equity is average compared to other major NZ businesses,” Beaumont said.
Tripe said another cause of growing spreads could be the mix of borrowers.
“Many larger corporations in New Zealand don’t borrow much from NZ banks.”
Because smaller loans are riskier, the “relative concentration of smaller loans” could be driving up average rates.
Competition
Another reason business lending rates are high could be competition in the banking sector.
Tripe said he thought a lack of competition probably didn’t do business borrowers “any favours”. Bagrie said the lack of variability in earnings across all major banks and their consistent “alpha” profits indicate limited risk in their lending portfolios.
“The banks are pricing for risk, but they’re not taking risk on the other side. They’re double dipping,” he said. He points to two reports, one from the Commerce Commission (ComCom) and another from the Organisation for
Economic Co-operation and Development (OECD), which have drawn similar conclusions.
“There is a stable oligopoly with no ‘maverick’ provider,” the ComCom report, published in March, said.
Orr has defended capital requirements, saying they are not dampening competition.
He has not commented on whether they could affect lending rates. RBNZ told BusinessDesk bank lending decisions are fundamentally commercial decisions “that individual banks make based on their own internal risk appetites”.
Former RBNZ chair (2003-2013) Arthur Grimes and Massey University retail banking associate professor Claire Matthews said four large banks and several smaller banks are sufficient for an economy of New Zealand’s size.
Likewise, the Banking Association’s Beaumont said there “are plenty of options if you’re looking for a loan”, adding the rollout of “open banking” could make it easier for people to shop around for a loan.
Tough times, everywhere
In a 30-page submission to the primary production select committee released on May 24, Federated Farmers wrote that 10 years ago, one in every 20 farmers said they felt under pressure by the banks; “this has now risen to a massive one in four farmers”. The bankers association pushed back, saying the rural lending market is “competitive, stable, and adaptable”.