By Andrew Laming, director of NZAB, the NZ-wide agricultural loan broker
WARREN Buffet has said if anyone tells you they know what is going to happen in the future they are either lying or they don’t know what they are talking about.
But how people feel about the future based on their observations right now is really interesting and can tell us a lot about what will play out in coming months.
Surveys are a good way of watching trends and one we watch really closely is the Reserve Bank of New Zealand (RBNZ) Credit Conditions Survey, published bi-annually.
The structure of the survey is relatively simple – the RBNZ asks banks what they expect both the demand for and supply of credit to be in the next six months in each sector, (residential, consumer, small and medium enterprise, agri and corporate), and what they observed over the past six months.
These are questions on sentiment but given that the big banks do control the strings of the sector capital availability, it pays to take notice.
There’s a lot of data in the survey but the subset with the best description is the three-year rolling average of credit availability – how does credit availability today stack up versus three years ago as a trend line?
Here at NZAB we have taken the data and graphed it, showing some stark trends between sectors that are worth paying attention to.
Now, it is important to note that these trends in credit availability don’t necessarily transpose into increasing net loans to each sector.
For example, lending volumes in the home loan sector are still growing as of last month and agriculture loans are still flat.
But this is a gauge of the banks’ desire of where the next dollar will go based on a whole lot of factors; sector confidence, credit quality and portfolio mix, to name a few.
Taken as a whole, banks are expecting a massive slowdown in credit availability in the residential sector while there will be a significant availability in the agriculture sector.
Another data set which is graphed is actual observed demand – which sectors are kicking down the doors of the banks for more loans.
Are these two data sets showing evenly matched trends?
Residential and business loan demand matches their expected lower supply, so nothing startling there.
However, agriculture loan demand is falling at a time when the longer-term trend of credit supply is increasing.
The agriculture loan demand line is falling even further than graph 2.
The survey also tells us that next six months expected demand for agri loans is lower still.
That will be a symptom of higher interest rates and regulations impacting confidence, but also strong profitability resulting in elevated loan repayments.
This is a notable mismatch between changing supply and changing demand.
The mismatch is starting to play out in the market where we are seeing very active competition for agri loans again.
In a future article we will cover what to look out for, the implications of the changing appetite and how to set up your business well on the back of it.
Understanding the see-sawing nature of bank appetite is critical when making longer term investment decisions that cover many different credit cycles.
In the meantime, take a look at the final graph showing what factors are causing the general slowing of the availability of credit.
The RBNZ survey asks the banks (and by default their customers) what are the biggest detriments to the change in credit availability.
We have translated that s data into a bar chart below shows the change in those factors over the past 12 months that are impacting on credit availability.
They are all in negative territory bar a very small glimmer of positivity in bank competition increasing.
We don’t see any surprises in the above data, although the cost of funds is significant from a future inflation perspective.
It shows how acute the rising cost of interest is on negative demand for credit.
When this flows through into reduced spending, and it will, and by how much, is yet to be seen.
While regulatory changes shows a smaller negative change in the past 12 months over the past 24 months it is a much larger 28.3% negative swing.
This is good if you think regulation is necessary to curb runaway lending but conversely the question then becomes, has this gone too far?
That is a question that will only be answered in time when we look at future credit growth.
