Our Insights

When you’re fixing your interest rate - are you managing your own risk - or your banks’?

Dec 9, 2021 7:48:58 AM / by Andrew Laming posted in Debt, Action, Planning, Budget, Banking, Strategy, Graduate

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We’re having a lot of discussions at present with our customers about fixing interest rates given the increase in rates via recent OCR changes plus expectations of further rate increases which are being forecast by most economists plus the RBNZ.  

We’re also seeing those expectations being played out in the swap curve, where 5-year swap rates have moved from historical lows of around 0% to a peak of c. 2.8% recently.  

This has led to plenty of discussion about the merits of fixing versus floating.

This short article is not about the merits of fixing versus floating (we will outlay some considerations on this topic in an upcoming article), but to highlight a significant discrepancy that we’re seeing between banks at present with their various fixed rates, even when standardised back to the same customer margin.

Take a look at the below graph, which is a data set of four of the main banks depicting the margin above the swap rate for each term of 1-5 years.

Now, its important to note a couple of things here:

  1. This is based on a customer base margin of c. 2.5 above a typical BKBM for illustrative purposes only. We observe plenty of margins both higher and lower than this. 
  2. The colours of the graph are meaningless versus the normal colours of the main banks.
  3. This is only one data point and only one consideration out of many when discussing and then agreeing on an interest rate risk management strategy.
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Squeeze the Credit Balloon Somewhere and It’ll Pop Out Somewhere Else

Nov 24, 2021 8:08:55 AM / by Andrew Laming posted in Debt, Action, Planning, Budget, Banking, Strategy, Graduate

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Some big upcoming restrictions on new home loan lending, combined with banks’ natural desire to keep growing their book is going to mean that credit is going to look for a home elsewhere.  

 

We think it’s going to be Agri.

 

 

 

 

So let’s set the scene with some recent bank jargon for you that is going to be talked about more and more.

  1. CCCFA regulations
  2. New DTI’s
  3. LVR restrictions
  4. Tax deductibility changes
  5. Brightline tests

The last three you would have all heard, but the first two are yet to impact. I’ll touch on them shortly – but to start with - guess what all of these measures have in common?

Well, they’re all designed to take the heat out of the residential market given the drastic house price increases of late plus win back the political football that housing has become of late.

And guess what - they’re starting to bite.

Whilst credit growth in the home loan sector is still increasing month on month it’s useful to look ahead at expectations for change in future.  

 

One of the best gauges for those future expectations is the “Credit Conditions Survey”, conducted every six months by the RBNZ.  

This survey is relatively simple the RBNZ asks banks what they expect both the demand and supply of credit in each of their lending sectors (residential, consumer, SME, Agri, Corporate) will be over the next six months.  

They are sentiment based questions but given the banks do control the puppet strings of capital availability, its pays to take notice.

And the results are starting to show some very stark trends. The expected demand and more importantly, the expected supply of capital to the home loan sector is expected to significantly pare back over the next six months.

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Real ideas to help the next generation into farming, whilst enhancing value for those exiting.

Nov 16, 2021 10:36:16 AM / by Tom Laming posted in Debt, Action, Planning, Budget, Banking, Strategy, Graduate

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Continuing on with the theme of getting the next generation into farming, Tom Laming talks in this article about his own family story, and then lays out some mindset and capital structure considerations that might help.

My grandparents immigrated to New Zealand from the Netherlands in 1950. Like many of their countrymen, bruised and battered post-war, the idea of a fresh start on the other side of the world held great appeal. And so with four children in tow (including a six month old son), some personal belongings and a container of furniture that would follow later, they embarked on a journey to a new world.

With plans to work on the wharves of the best available port turned upside down by the 1951 waterfront dispute, my Grandfather turned to farming (an industry he had little to no background in) to provide for his growing family.

After moving around a few jobs in South Canterbury, he and my Grandmother and their now seven children settled in Waimate on their own farm in 1960. Talk about a land of opportunity – ten years after hitting the shores of New Zealand they were in a position to buy their own piece of land, having come to the country with little more than a desire to work hard and some good old-fashioned Dutch spirit.

I think you could categorically say that you wouldn’t find a story like that today, yet 60 years ago that pathway was pretty commonplace.

What’s really interesting is how our family’s ties to the rural sector have evolved since.

Of their four boys and three girls, three of the boys went farming, one became a vet and the three girls all married non-farmers (although they all maintained very close ties to the home farm).

Being prolific Catholic breeders, those seven children produced 30 of the next generation. And at the last count, only three of my generation are actively farming, with a few more of us retaining ties via professional endeavors to the land.

So, an industry that supported my grandparents into their own purchase in ten years, that provided such a great upbringing for many of us, has only held three in active farming roles.

And you will find many similar stories around the country. Where bright and driven minds brought up within farming businesses have left the industry altogether, taking their skills and the lessons learned from farm-life and parlaying those into success in other industries.

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Our Investment in Growth Continues

Nov 9, 2021 9:59:11 AM / by Scott Wishart posted in Debt, Action, Planning, Budget, Banking, Strategy, Graduate

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It has been a busy couple of months for NZAB! Our strategy of continuing to invest in hiring the best people and being accountable to our customers is continuing to pay off.

I'd like to introduce three new staff to our business and one internal promotion. We've also successfully concluded our first graduate programme intake and hired our first graduate who starts next year (more about that in a future email).

Cameron Black has relocated from our Christchurch office to Invercargill and has been promoted to Client Director. We are really proud of Cam, he was our first employee and has very much been a core part of our growth to date. It has always been a goal of his to get to a point where he could head back home to Southland and build a long term career helping farmers be successful. We can't wait to see what he achieves in this next phase!

Alongside Cam, we have also been joined by Jennifer Horn and Anna Case who have joined NZAB as Associate Client Directors to support Michael, Grant and Cam.

Southland has always been an important focus area for us, so it is really exciting to now have a team of five on the ground in Invercargill!

Additionally, we have been joined in Christchurch by James Schrader as an Associate Client Director supporting Nathan, Nick, Cam Blain and Jordain.

Scroll down to learn a bit about our new team members.

NZAB is now a team of 22. That's something we are pretty proud of. Thankyou to our customers for giving us the right to exist and grow alongside you.

Here's to the journey ahead!

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Getting paid in the future means you have to live in the future

Oct 28, 2021 7:38:16 AM / by Tom Laming posted in Debt, Action, Planning, Budget, Banking, Strategy, Graduate

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I love quotes. Anything that looks inspiring, thought provoking or particularly releva nt goes into an increasingly large file on my iPhone.

That file is now populated with such gems as:

“treat a man who he is and he remains as he is, treat a man as he can and should be and he will become as he can and should be”,

“well behaved women seldom make history” (great for a guy with two strong willed daughters!), and

“the person with the greatest why will achieve any how”.

I came across a quote recently that really stood out to me and seems so very applicable to the world we live in. I follow a guy on twitter called Naval Ravikant, an Indian-American entrepreneur who seems to sideline as a philosopher.

The quote was “if you want to get paid in the future, live in the future”.

As someone who is constantly striving for enduring relevance, this quote really jumped out to me. And in a rapidly changing world where the way we get paid and thrive in so many industries seems under threat, it seems like a great way of re-framing how we approach our day-to-day lives, our businesses and our strategies.

So to get paid in the future (no matter what we do or produce), we need to live in the future. What does that mean?

Here are a few of my thoughts:

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Here’s what to do with Fonterra’s Extra Billions: Invest in the Next Generation.

Oct 14, 2021 7:54:01 AM / by Andrew Laming posted in Debt, Action, Planning, Budget, Banking, Strategy, Graduate

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Most of you would have all read Fonterra’s recent annual results. Amongst the good news about ongoing high payouts, they also updated shareholders on their long-term strategy.
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The NZAB Graduate Programme

Oct 3, 2021 9:10:31 PM / by Scott Wishart posted in Debt, Action, Planning, Budget, Banking, Strategy, Graduate

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Falling Agri Bad Loans Give Further Cause for Greater Bank Appetite

Sep 29, 2021 9:58:48 AM / by Andrew Laming posted in Debt, Action, Planning, Budget, Banking, Strategy

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Last week, we put out our Agri Bank dashboard showing all the movements in the Agri Banks from portfolio size to market share.   You can find the article here.

In this article, we wanted to dive into a particular dataset that is very meaningful for farmers with their access to credit.  

 

This particular dataset is the “Non-Performing Loans Ratio” or “NPL’s”

Put simply, this is a ratio (expressed as a percentage) of the banks “non performing” Agri loans over its total loans.

A non-performing loan is defined as all loans overdue or those that are overdue.

The actual definition can get quite complicated and differs between banks*, but broadly it’s a very good measure of the quality of the credit sitting in that respective bank’s portfolio.  

This dataset is a “canary in the coal mine” in respect to changing bank credit appetite and ultimately the cost of that credit.

And we all know that when a market has more supply, price generally drops and vice versa.

When examining the data, it’s not just what level it is at right now, but the way the trend line is heading.  
(* Rabo is a case in point, by design, they run a very high ratio of non-performing loans due to internal decisions- this does not mean that the quality of their lending book is worse – i.e they have a different approach for calculating.)

Also, NPL’s should not be confused with actual bank losses via write offs.   These are much lower again and are normally represented by “individual provisions”.  

The graph below shows the major banks NPL’s over the last three years, with a non- weighted* average line through the middle.
(* non weighted meaning that its does not take into account the relative size of each bank’s Agri portfolio when calculating the average, however the trend line is still instructive as to what’s occurring)

 

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Latest Edition: The NZAB Agri Bank Dashboard

Sep 14, 2021 10:22:35 AM / by Andrew Laming posted in Debt, Action, Planning, Budget, Banking, Strategy

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Knowledge is power.

Below is our quarterly snapshot on all bank movements, with source data from RBNZ for the period ending 30 June 2021.

We put this together so you can understand the increasingly complex forces at play driving access to capital and the cost of that capital.     

Understanding this is critical - not only saving time and focus by putting your energy into the right parts of your credit process- but also to increase your chances of getting the right credit result.

In this edition: even though is only been 90 days since the last update, so much has happened in that time. 

Bank lending continues to break records and nearly all of it in the home loan sector.   

But for the first quarter in a long time, Agri has experienced a small growth in loans - could this be the turnaround? 

Market share change analysis shows:

  • One major bank in freefall, but that same bank is also well set up for future growth with very low 
            non-performing loans and a good capital base.     
  • One other bank has turned a corner after shedding dramatic amounts of Agri loans.
  • And it's probably no surprise to see the debt repayment coming nearly solely from dairy. 
  • Conversely, horticulture debt continues to grow at well above market rates - is this a sign of a            sector expanding, or are banks simply more expansive in this sector to re-balance their  portfolios?

As always, if you have any questions, please contact us directly.

 

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Transformational Change - What Your Farming Business Can Learn from Nintendo.

Sep 1, 2021 8:40:51 AM / by Tom Laming posted in Debt, Action, Planning, Budget, Banking, Strategy

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We spent a few days in Cromwell with the kids at the end of the last school holidays. After a fairly long and dreary Timaru winter it was nice to escape to the open spaces of Central Otago.

 

 

 

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