Monday, April 22, 2024

STRAIGHT TALKING: Decline in credit confidence

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ANZ’s Business Outlook Survey for August showed a net 53% of businesses expect it to be more difficult to get credit looking forward, the toughest reading on record. The net is those expecting it to be easier less those saying more difficult. A net of 53 says few expect it to be easier, and a lot are saying harder.
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ANZ’s Business Outlook Survey for August showed a net 53% of businesses expect it to be more difficult to get credit looking forward, the toughest reading on record. The net is those expecting it to be easier less those saying more difficult. A net of 53 says few expect it to be easier, and a lot are saying harder.

Most survey responses were received prior to the Level 4 lockdown. July was the second worst month for reported credit conditions, with 51% expecting it to be more difficult.

A net 65% of farmers expect it to be more difficult to obtain credit. That is not quite the previous low of minus 69% in July 2019.

Throw together supply chain disruptions, rapidly escalating costs, labour and productivity disruptions and lockdowns, and you have pressure on business cash-flow. An underappreciated reason for business failure is a lack of working capital or the cash to manage short-term commitments and operations.

This is a time when banks and the government are really going to need to step up with some sort of facility, and work together, especially for Auckland-based small-to-medium sized enterprises (SMEs) if lockdown extends.

But the trend in credit conditions and persistent perception of difficulty to obtain credit in the ANZ survey is the real disconcerting part. It has not been perceived as easier to get credit since 2016, rather more difficult for the past five years.

Of course, credit is not a free lunch, there are risks involved.

Businesses and farmers cannot just point the finger at banks. Some businesses are not really that bankable. This is a real issue that many businesses need to take ownership of; better bankable businesses are more saleable businesses.

Many businesses are just not good at managing their financial positions, relying on numbers ticking over themselves, they overpromise and underdeliver and fail to explain how identified problems are being addressed. Banks see the good performers, and others, with a wide variation.

Banks hands are also tied on some levels.

Lending on a house carries a lower risk weight than a business or agriculture loan, which means less capital needs held. Banks are being told to hold more capital. They get capital relief by switching to housing.

Compliance dominates everything, it is necessary and important. But compliance looks to be complicating the lending process so much, it has become a real struggle for frontline staff to support customers.

But it is also time more questions were asked of banks, who are remarkably profitable by international bank standards.

A strong health response, vaccinations, and the business sector is what will drag us out the other side of this covid mess. Wellbeing and almost $320 billion in lending against houses needs jobs and incomes to support it.

That economic base comes from the business and agriculture sector. Consistently favouring housing – while incentivised by the risk weights, which favours housing – is short-term thinking not backing the long-game. 

Banks continue to shy away from investing sufficiently to lift their systems into a modern, functional, staff and customer-centric platform. They are investing, but insufficiently. Years of underinvestment requires serious money.

Many farmers will be noticing the churn of their rural manager, if they still have one at all.

Feedback is that many frontline staff with a customer bent are feeling ostracised and unvalued. The endgame is pursuing another career, which eliminates people with critical banking skills and experience.

Market feedback is also that bank turnaround times are stretching to a month or more. Banks have trimmed so many people, the customer waits too long for feedback or an answer.

Farmer satisfaction levels with their banks are on a downward trajectory, according to a Federated Farmers’ survey.

The bias against agriculture from some has been significant in the past five years. Some was warranted given dairy sector debt levels, but a lot of balance sheet deleveraging has taken place putting the sector on a firmer footing.

It is time for the banks to really step up and support SMEs and farmers. A couple have been. Taking a more long-term approach on staffing, technology, risk and profitability are imperatives.

Cameron Bagrie is the Managing Director of Bagrie Economics and a shareholder and director of Chaperon – helping businesses navigate banking. His views do not constitute advice.

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