In its latest report on the performance of the banking sector KPMG’s head of banking and finance John Kensington has sounded the alarm about the RBNZ’s proposal to make the banking sector capable of sustaining a one-in-200-year financial shock.
The proposal, which caught the sector by surprise before Christmas, requires a near doubling of the capital held in reserve by banks and came when the sector expected only minor adjustments to what banks already hold.
“When you compare New Zealand to Australia or Europe our model is tough.
“The Reserve Bank is saying we have a very good banking system but that it would be appropriate to think about what sort of shock that system can absorb and they are getting a public view of that.
“Their research seems to indicate they think one in 200 years is about right,” Kensington said.
Reserve Bank governor Adrian Orr said the capital could be raised by retaining 70% of all bank dividends for five years, the proposed transition period.
But Kensington said that will not play well with bank shareholders who would effectively have a reduction of their returns and a dilution of their bank’s value would inevitably follow.
“Basically, your return on equity goes down so you have to make even more profit to counter that and I can’t see banks making more profit on top of what they have made being very popular with the public.”
Banks have instead indicated they would be forced to scrutinise a range of actions including raising more capital, reducing deposit rates and increasing lending rates.
They might also review lending to sectors performing less well or unable to provide security and possibly consider rationing the credit issued to those sectors.
“And two of those sectors are construction and dairying.
“They will look carefully at types of lending that are carrying losses or provisions for bad loans.”
The dairy sector already faces headwinds around bank lending conditions, with banks now required to seek a greater portion of principal repayments after almost a decade of interest-only payment options.
Farmers Weekly contributor Professor Keith Woodford has calculated the sector’s bank debt is $22 a kilogram of milksolids or $41.6 billion (Farmers Weekly, February 18).
Overall sector debt is 49% of assets but 20% of farmers have greater than 70% debt on their assets.
He noted banks are no longer queuing up to finance dairy farmers and when funds are available Government policy requires funding no longer be available on an interest-only basis.
The sector faces the pressure of aging farmers wanting to exit, a younger generation less interested in farming and a vacuum of funds now foreign buyers have been removed by changes to overseas investment.
“And looking to the future there are issues around sustainability and environmental controls that are all added costs which we do not really know how they will play out yet,” Kensington said.
While the RBNZ has emphasised it is only in a consultative stage Kensington is wary about how much the final decision might depart from the proposal.
“If you look at the last two consultation rounds on open bank resolution and outsourcing, they ended up pretty close to what they (RBNZ) were seeking.”
But the RBNZ has been at pains to encourage submissions from a wide range of parties.
A Westpac spokesman said the proposal for banks to hold more capital will have implications for its business and customers.
“Capital buffers ensure banks have sufficient capital to get through a serious economic downturn.
“However, too large a buffer limits banks’ ability to innovate and enhance customer outcomes and can add significant cost to us and our customers.
“The Reserve Bank has extended the consultation period out to May 3 and we’re talking to all stakeholders to provide the most detailed feedback possible.”
Neither BNZ nor ANZ were prepared to comment.