China’s CCB keen to fill funding gap
Rely less on Australian banks, says financier
China Construction Bank (CCB), the world’s second biggest bank, wants to become more involved in funding New Zealand infrastructure and housing projects as the country becomes less reliant its traditional lenders — Australia’s big four banks.
CCB New Zealand, which gained a local banking licence in 2014, already has a balance sheet worth $1 billion.
It has supported some large corporate transactions and is involved in the mortgage market. Its New Zealand mortgage book — lending to its mostly Chinese customer base — stands at $400 million.
The bank is the biggest infrastructure lender in China by a comfortable margin, and is second in size only to the International and Commercial Bank of China.
The New Zealand operation of CCB was one of a small group of funders to get in behind the Puhoi Motorway extension.
New Zealand deputy chief executive Lloyd Cartwright said local borrowers would need to look further afield for funding, based on the country’s future infrastructure requirements, the need for more houses and what he said would be tighter credit conditions in the years ahead.
Cartwright said the need for new sources of funding would increase as credit available from the big four banks tightened as they comply with Australian Prudential Regulation Authority (APRA) regulations, specifically standard APS222, which banks were informed of in 2015.
The changes give Australian parent banks five years to reduce their non-capital New Zealand operations to less than 5 per cent of Tier 1 capital.
“Increasingly, the New Zealand arms of those Australian banks are deferring to APRA over the Reserve Bank of NZ in terms of those regulatory overlays,” Cartwright said.
There was also the issue of a widening gap between credit growth and deposit growth, with household borrowing continuing to outpace household deposits, he said.
Cartwright said the bank was likely to apply to the Reserve Bank to operate as both a subsidiary and a branch, which would open the local operation up to the group’s balance sheet, capital, funding base and product expertise — particularly in infrastructure.
He expected the other big Chinese banks operating here — International and Commercial Bank of China and the Bank of China — to follow suit.
Cartwright said more infrastructure development in New Zealand meant borrowers would need to look further afield for funding.
“New Zealand has a large infrastructure requirement over the next 20 years and it is not going to be funded by the existing banking group — it’s just not possible,” he said in an interview with the Herald.
“We believe that there is a significant opportunity in New Zealand, for not only us, but for some of the other incoming banks, to support some of those large projects.
“A branch structure would enable China Construction Bank to do some of that larger lending.”
Commenting on Auckland housing developments that failed to go ahead last year, Grant McKeown, the bank’s director, institutional and corporate banking, said developers needed to work with their banks at an earlier stage of a project.
Developers also needed to look at a wider network of banks to fund their projects, so the sales process, funding and construction could be brought closer together. McKeown agreed that borrowers would need to look further afield.
“Chinese banks don’t have the same linkages to APRA, and the Melbourne property market is not going to contaminate our outlook on a good project in New Zealand,” he said.
In terms of the so-called funding gap, McKeown said there needed to be a “broadening of the mind” in terms of the funding options.
“If Auckland wants to build the houses that it wants to build, and if New Zealand wants to do what it wants to do, it’s going to have to broaden out its horizons in terms of its funding — away from the big four Australian banks,” he said.
“There is a surplus of global equity and capital looking for good projects, so if the demand story in New Zealand is robust, there is capital that will flow,” he said.
The longest, strongest construction growth phase in this country’s history will peak soon, but activity will stay high for some time, predicts a survey out today.
The forecasts are from industry analyst and economic forecaster BIS Shrapnel, which has released its Building and Construction in New Zealand 2017-2018 report.
Last week, Building and Construction Minister Nick Smith said this cycle was unprecedented, and cited house building in particular.
“This is the longest and strongest growth phase in building activity in New Zealand history,” Smith said on Thursday. “It involves record levels of investment in homes, commercial buildings and infrastructure. The total value of consents in 2016 at $19b is the highest ever and 30 per cent more than the previous peak last decade, in inflation adjusted terms.”
BIS Shrapnel says activity will stay strong.
“The total value of building authorised (including residential and nonresidential) is expected to peak in the financial year ending March 2017 and will remain above $10 billion in the next two years before activity levels off,” the report says.
The RLB Crane Index, out in November, found Queenstown’s building boom had pushed crane numbers there up by 600 per cent in the past few months. Auckland crane numbers rose 156 per cent, Wellington 83 per cent and Christ- church 14 per cent. New Zealand has more cranes in place than any of the 11 United States cities the index tracks.
The BIS Shrapnel survey forecast only a minor adjustment.
“The slight decline in 2017/18 is expected to be the first year of negative growth in the overall sector for five years, while dwelling construction is forecast to continue growing until 2019/20, representing seven years of consecutive growth. Following a period of cyclical adjustment, construction activity is forecast to once again rise above $10 billion at the end of the outlook period in 2021/22, back near the record high reached this year.”
Population growth is one of the key reasons for the level of construction, says the report. “Net migration continued to surge in 2016 and the latest indication is that these high flows are likely to continue, with the 2017 year ending June set to be another record year of inflow according to our estimate.
“The construction sector will also be supported by the promising outlook for the economy over the medium term. A healthy labour market and persistent accommodative monetary policy settings are expected to provide a boost to domestic consumption and business investment while the strong tourism sector will continue to lend support. Building activity in the coming year and beyond is likely to still be led by Auckland,” BIS Shrapnel said.
Satish Ranchhod, Westpac NZ Research senior economist, noted last week how the national number of new residential dwelling consents fell sharply in December, down 7.2 per cent, according to Statistics NZ information. That weakness was mainly centred on Auckland, he noted.
BIS Shrapnel says strong growth through migration, the deficiency in housing stock and the Auckland unitary plan will result in more houses being built.