Bank’s warning to farmers
ANZ Bank has warned its farming customers they face higher borrowing costs almost immediately due to Reserve Bank intervention, even though wholesale interest rates have been falling sharply for more than a year.
In a letter sent to those and other business customers last month, Mark Hiddleston, ANZ’s commercial and agri division managing director, says the Reserve Bank told ANZ in February that it would have to have to increase the amount of capital it holds against agricultural loans by June 30.
“This increase is because we currently hold less capital for our agri loans than other banks and the RBNZ believes the quality of our loan book is not sufficiently better than the others to justify that lower amount,” Hiddleston’s letter says.
ANZ Bank is New Zealand’s largest. Its results earlier this week showed its share of the $62.5 billion agricultural lending market stood at 28.5 per cent in February.
ANZ has been gradually reducing its agricultural exposure and its market share has dropped from 39.1 per cent in September 2010.
“As you would appreciate, the cost of capital, whilst not the only driver, is a material input cost of doing business,” Hiddleston says.
“Like most businesses, significant increases in material input costs generally lead to an increase in prices for customers,” his letter says.
In the wholesale market, the twoyear swap rate has dropped about 30 per cent from 2.31 per cent in April last year to 1.62 per cent currently.
“In the immediate future, we intend to await the outcome of the May official cash rate determination from the RBNZ before we decide what movement, if any, there will be to interest rates on our agri loans,” it says.
“A reduction in the OCR could assist in the near term in absorbing capital costs that would potentially otherwise need to be passed onto our agri customers. We’ll let you know if this first development impacts you.”
The OCR decision and monetary policy statement will be delivered on May 8. While some economists are expecting an OCR cut, ANZ’s own chief economist, Sharon Zollner, expects the central bank to hold off until August.
Hiddleston said that unlike ANZ's mortgage book, most of its agricultural borrowers opt for floating rates. If the OCR is cut, ANZ would be able to hold the rate it charges farmers on floating rates, rather than following the OCR down, and recover its costs that way. The bank's funding costs would also go down.
ANZ had been debating internally about how to inform its customers about the situation. “I can't sit in front of my team and my customers and not raise the awareness,” Hiddleston said.
In May last year, the Reserve Bank revealed the results of a benchmarking exercise it set the four major banks, ANZ, ASB Bank, Bank of New Zealand and Westpac, asking them to report on how much capital they would need to support a hypothetical portfolio of loans to 20 dairy farms.
Each of these banks uses its own internal models for calculating its risk-weighted capital requirement to meet regulatory minimums.
The other smaller banks in New Zealand are forced to use standardised models which means they have to hold more capital proportionately and are therefore competitively disadvantaged.
While the central bank didn’t name which bank produced which outcome in the dairy portfolio test, it found an extraordinary 40 percentage-point difference between the highest and lowest average riskweights among the big four.
“The provisions results show significant variation in model outcomes, even for the same level of underlying risk,” the Reserve Bank said at the time.
It was this disparity that was one of the factors that fuelled the higher capital proposals the central bank is consulting on — the consultation period is set to close on May 17.
The proposals include a near doubling of the minimum tier 1 capital, or equity, each of the big four banks has to hold from 8.5 per cent to 16 per cent. The benefit they get from using their internal models will be reduced to 90 per cent of the results the standardised models produce.
The Reserve Bank is proposing a five-year phase-in period for the change. ANZ’s letter is the first public indication that any of the banks have been forced to increase capital earlier.