Saturday, December 2, 2023

Concern high business loan interest rates subsidising housing sector

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Banks seem ‘happy to lean on the business sectors to keep home lending on life support’ says agribusiness adviser.
NZAB director Andrew Laming says the margin return for banks from business loans versus housing loans is greater than normal.
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The growing gap between interest rates charged by banks for agricultural and business loans compared with housing loans is a worrying trend for farmers and orchardists.

NZAB director Andrew Laming said the historical gap is widening and that banks seem to be using higher margins on business loans to subsidise the housing sector.

“It appears that banks are happy to lean on the business sectors to keep home lending on life support,” he said.

The agribusiness adviser and former rural banker used the latest Reserve Bank of New Zealand (RBNZ) data to compare the interest income earned by banks on residential mortgages versus on business loans, of which agri loans are a $62.5 billion slice.

Laming said agri mortgage broker NZAB operates across all major banks and keeps a close eye on bank funding costs and their underlying drivers.

Banks point out that business and agri loans require more of a bank’s own capital, as determined by the RBNZ, and there are different security rules and risk management factors.

Since bottoming out at plus-minus 3% nearly two years ago, average rates on business loans have risen sharply to above 7%, whereas average home loan rates have yet to hit 5%.

For borrowers who are coming off fixed terms, the re-fixing options for business loans are 8-9% compared with 6-7% for home loans.

The gap is wider than in the past, especially during the long period when all interest rates generally were much lower, Laming said.

Other means of comparison are the relative margins between housing and business loan rates and the costs of borrowing for banks, using RBNZ data on the average interest rates on bank deposits.

The margin for banks on home lending is below 1%, while for business lending it is 2.75%.

“It is hard not to conclude that banks are elevating the margins for their business and agri customers to keep afloat the housing loan market, an easier place for them to lend and earn profit.

“Keeping home loans lower than what they otherwise would be encourages relatively more activity in this sector.” 

The first response from the big trading banks is to point out the cyclical variability in floating versus fixed interest rates and agri versus housing loans.

The ANZ business and agri regional manager for East Coast and Lower North Island, Marcus Bousfield, said two-thirds of agri loans are on floating rates and these have reflected the sharp rise of 5% in the OCR over the past 20 months.

“Those borrowers have felt the direct impact of the Reserve Bank’s monetary policy moves, while homeowners are mostly on fixed rates, some of which may be yet to rise.

“Variable rates for home loans at present are around 8.5% but there is a lag effect still to be worked through.

“This is the most volatile time for interest rates since 2008 and unfortunately businesses are feeling it first.”

Regarding the allegation of cross-subsidising housing and business sector lending, Bousfield said business lending is very competitive and any such prolonged disparity would be evident to all business owners.

Farmers have repaid debt in recent times and now that rising costs and falling product prices are occurring together there may be room for switching off principal repayments.

“We acknowledge the very real cost pressures on our big productive sector, and the speed of the rate rises, and we are here to help our clients through this.”

Westpac head of agribusiness Tim Henshaw said agri and housing lending portfolios are entirely separate.

“Agri lending rates tend to be higher than housing lending for a number of reasons,” he said. These include differing risk profiles and loan terms.

“Having paid down debt, with strong balance sheets and previous experience, we believe the vast majority of our customers are well-placed to manage the current interest rate cycle.

“If they are feeling under strain we encourage them to talk to us, so we can discuss financial options and what other support may be available.”

ASB said that RBNZ capital regulations require banks to hold higher levels of capital for business loans than for home loans, which directly influences pricing.

New capital requirements were introduced in 2022 and will gradually increase until 2028.

“Because of the relative risk profiles, business lending is more impacted by these increases than home lending,” ASB said.

Professor David Tripe of Massey University’s School of Economic and Finance, said it would be easy to conclude banks are starving farms and business of finance but there is not enough evidence to draw any conclusions.

“Because so much lending for housing is done at fixed rates, it is a key area for competition.

“Some banks got into more trouble than they want on farm lending and this now impacts their approach.”

Rabobank NZ chief executive Todd Charteris said there has been a small increase in non-performing agri loans during this year, against a backdrop of very low levels in the past decade.

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