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Andrew Laming


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Submission to the Primary Production Select Committee Regarding Rural Bank Lending

May 22, 2024 7:37:49 PM / by Andrew Laming posted in Debt, Action, Planning, Budget, Banking, Strategy

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New Zealand Agri Brokers Limited (NZAB) was recently invited to make a submission to the Primary Production Committee on Rural Lending. This is a New Zealand government select committee chaired by MP Mark Cameron.

The committee opened a briefing (not a full-scale inquiry) into this topic as they had received widespread feedback from farmers and other industry participants about the apparent disparity between rural and urban bank lending practices.  They are initially seeking to gain a better understanding of the nature of the problem before working out any next steps.

NZAB made the following submission and as this is a public process, we thought it would be useful to share our submission with our wider farming and farm professionals’ audience.

If you have any question on any part of our submission, please feel free to contact us.

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Is Inflation Already Beaten?

May 1, 2024 12:53:07 PM / by Andrew Laming posted in Debt, Action, Planning, Budget, Banking, Strategy

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Information only disclaimer. The information and commentary in this email are provided for general information purposes only. We recommend the recipients seek financial advice about their circumstances from their adviser before making any financial or investment decision or taking any action.

The recent CPI release of 4.0% for the year ended 31 March 2024 was a step in the right direction, falling further again from the December number of 4.7%. It arrived in line with economists’ consensus levels and slightly higher than what the RBNZ thought (3.8%).

But it was still noticeably above the ‘accepted’ 1-3% target range.  

Consequently, the RBNZ let all parties know it, with a brief statement noting that the “OCR needed to remain at restrictive levels for a sustained period”. Also unhelpful was that despite ’tradable inflation’ printing at 1.6% p.a., non-tradable inflation was 5.8% p.a. (more on this at the end of the article) leading most economists to say “we need to be here longer” and pushing out rate cut forecasts further into 2025.

But are we yet again being over obsessed with looking backwards rather than looking at what’s happening right now?

Let us explain. The latest CPI print of 4.0% is made up of 4 quarters - and they look like this:

Quarter ending June 2023:                         1.1%

Quarter ending September 2023:           1.8%

Quarter ending December 2023:             0.5%

Quarter ending March 202424:                0.6%

Total equals                                                           4.0% for the year

 

So, what if we extrapolated forward the last six months of CPI change and annualised this to the rest of the year?

Well, we would get a 2.2% inflation rate, being (0.5%+0.6%) x 2 which is smack bang in the middle of our target range.

The graph below shows it best by plotting the six-month annualised figure against the annual figure since 2017.

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Are Dairy Returns a Perfect Hedge for Inflation?

Mar 20, 2024 1:53:47 PM / by Andrew Laming posted in Debt, Action, Planning, Budget, Banking, Strategy

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Information only disclaimer. The information and commentary in this email are provided for general information purposes only. We recommend the recipients seek financial advice about their circumstances from their adviser before making any financial or investment decision or taking any action.

 We’ve been through (and arguably are still going through) a period of       pretty ugly inflation in New Zealand.   Inflation has impacted on all   sectors of our economy. but farming felt it more keenly being exposed to   some big increases in wages, fertiliser and fuel.

So, given the changes in inflation, what does a good milk payout now look like?

With many farmers looking to make investment decisions and also considering hedging policies, we thought it might be useful to put out a few graphs showing the difference between inflation and non inflation adjusted payout data over the last 20 years to assist.

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Southland Dairy Private Debt or Equity Opportunity

Mar 4, 2024 4:15:44 PM / by Andrew Laming posted in Debt, Action, Planning, Budget, Banking, Strategy

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9 Things To Get Excited About This Year

Jan 26, 2024 1:30:52 PM / by Andrew Laming posted in Debt, Action, Planning, Budget, Banking, Strategy

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Information only disclaimer. The information and commentary in this email are provided for general information purposes only. We recommend the recipients seek financial advice about their circumstances from their adviser before making any financial or investment decision or taking any action.

Let’s be honest, last year was a bit tough.  

Expectations of dairy payout dropped to very low levels, lamb prices kept going lower than expected and interest rates went higher on the back of inflation that was stickier than ever. On top of that we started the year with a devastating cyclone that ripped the heart out of a major horticulture area, and we had a government that very few farmers thought was in their corner.    

It wasn’t just farming either – homeowners and business owners alike all got a collective feeling of malaise as recession started to spread its tentacles. Confidence surveys in both farming and non-farming sectors alike plumbed new depths.  

But, for this article, it’s a new year and let’s sweep the broom a bit for 2024, because there’s some things that farmers can start feeling more optimistic about as we head into the year.

 

1. Interest rates have leveled off and look likely to fall. 

It’s hard to imagine that a little over 12 months ago (pre-xmas 2022), we were at an OCR of 3.5% which was then lifted to 4.25% in Dec 2022. Very few (read: nil!) commentators were predicting that we would end up as high as 5.5% before the job on squashing inflation appeared done.  

But the story has changed.

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With Bank Profits Falling, Be Very Wary of the 2024 Response.

Dec 8, 2023 8:26:16 AM / by Andrew Laming posted in Debt, Action, Planning, Budget, Banking, Strategy

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Information only disclaimer. The information and commentary in this email are provided for general information purposes only. We recommend the recipients seek financial advice about their circumstances from their adviser before making any financial or investment decision or taking any action.

A few of the main banks have just finished their full year reporting releases and their profits are again hitting high levels on the back of record net interest margins and lowering operating costs.

The New Zealand divisions are all performing handsomely on the back of the ongoing expansionary lending to the home loan sectors in the earlier part of the financial year plus record margins on the back of the open supply of cheaper funds.

However, it’s worth paying particular attention to the near identical messaging coming from the Banks about their first half performances being much better than the second half.

Here’s some statements they’ve made:

ANZ, in its press release noted that “it was a game of two halves. The good performance of the bank in the first half of the 2022/23 final year reflected the tailwinds of the Covid fiscal stimulus in the economy..”   and “but in the second half of the year our performance slowed due to the more difficult environment NZ is entering”.

BNZ’s CEO Dan Huggins, who recorded a record rise in profit, noted that “BNZ's profit fell 12.5% in the second half-year versus the first-half to $704 million reflecting a broader economic slowdown in New Zealand” and “The second-half net interest margin dropped nine basis points to 2.36% from 2.45% in the first-half.

 

Let us interpret this for you.

Home lending growth has stalled, and deposit rates have climbed higher than expected, reducing the record margins banks were otherwise enjoying when there was excess cash floating around New Zealand, a result of the record stimulus provided by the government and RBNZ at the time. The Banks’ increase in profit is a result of extra lending volume multiplied by any additional margin increase between cost of deposits and return on loans.

We noted this starting to appear when we opined that Banks were increasing their business and agri margins at a greater rate than needed due to fixed rate home loans dragging on their returns

 

At this point, it’s worth remembering how Banks think when it comes to setting performance targets for their profits for their upcoming year.

Typically, cyclical considerations (i.e higher profits at times where market conditions allow, lower profits when not) are largely ignored. Instead, a newly minted, higher profit target is sought for the upcoming year, regardless of how good the prior year was.  

Typically, this “ask” will range between 5-10% increase on the prior year. This will need to come from either greater lending, better margins or lower costs. In most cases, all of these categories are targeted.

The Bank is a business and businesses increase profit by either selling more at better margins and at lower costs of operation. For Banks, this is largely a function of more lending growth (volume) x better lending margin (the gap between costs of deposits and lending rates) less business operating costs (people, branches and systems).  

Now let’s overlay that with the current speed of the economy. The back half of 2023 has seen a sluggish economy with low lending volumes.

Flowing into at least the first half of 2024, the forecast is for more of the same with persistently higher interest rates continuing to stifle credit growth.

 

With this backdrop in mind, we see the following things becoming evident in the Agri lending market as we go through 2024.

 

1. New transactions or customers that fit neatly* (*see point 4 below) into Banks’ Agri lending appetite, and in particular those from new customers, will remain strong and possibly get stronger.

Despite much lower commodity product prices and much higher interest rates, demand for new Agri transactions will remain strong where they fit into tight banking criteria.

This is the volume part of the increasing profit equation, a simple rationale of needing to continue to grow the balance sheet against a backdrop of lowering demand. The need for volume will be exacerbated by low lending volumes in the housing market.

If the deal fits neatly into Bank criteria, expect to see most main Banks lining up to bank it, with strong appetite and with very strong competition with pricing.

 

2. Conversely, look for Banks to increase margin on existing customers, or be slow to pass on reductions in deposits costs.  

This is where we will really see a two-step market.

The need to deliver profits against a backdrop of low lending volumes means that there will be increased focus on the margin multiplier of the profit equation. This will be in the form of portfolio wide increases in margin for “funding” or “liquidity” premiums and will become more evident when underlying base rates (30-80 day bills and swaps) begin to fall.

Equally, whilst Bank deposit costs have been increasing for the last two years, these are now starting to reach their peak and will eventually start falling. How quickly or slowly this is passed on is a strong profit determinant for the Bank.

You will also see a stringent focus on “pricing to the risk curve” – this means that those customers that have higher credit risk will ultimately be charged more as Banks look closely at each customers’ credit rating and ensure they are getting an “efficient” return on their capital. This will feel particularly difficult for those customers who are already under profit pressure.

 

3. Look out for further Bank “head count” reductions to lower operating costs.

The final lever that Bank’s will be examining is their ability to earn the same, but with less operating costs.

Ultimately this means working their business towards a “lower cost to serve” with more accounts per bank staff member or a greater use of technology to make non-human decisions. Either way means that the average banker will be having to do more, with less.

Having the necessary time to understand your credit proposal will come under pressure, particularly if it’s not presented well or not perfectly “in the box”.

 

4. The “swift and easy” credit approval “box” will continue to get smaller, leading to the need to present transactions even more carefully and consider non-main Bank capital solutions.

This is the double-edged sword from the above point- less time from bankers to consider applications and in general, less desire to consider transactions that don’t meet strict bank underwriting criteria or spend time on transactions that have been prepared to a sub-par level.

More than ever, if a Bank does not show appetite with a transaction, it does not mean that the farmer's strategy is flawed, its just that the Bank’s credit underwriting criteria is getting tighter, or possibly the credit risk is not presented in the right manner. And that’s a very important distinction.  

This will mean farmers will need to think carefully about how they present the transaction, plus consider other, more suitable forms of capital, including equity or non-main bank debt capital to better achieve or execute on their strategy.

 

So, what should you do with all this?

First, none of this is new, but here are some things that will become really important for you in 2024.

1. Ensure that your strategy and credit proposal is well presented.  

The banking process is equal parts objective (financials, balance sheet etc) and equal parts subjective (judgement on quality of decision making, advisors, strategy, rationale for past performance etc).

Knowing how to present your business in line with how a Bank assesses credit risk is vital for a yes or no, plus also for how your credit rating lands. This is doubly important where bankers have less time to understand what you’re trying to achieve/ask for.

 

2. Create a market for your loan.

This doesn’t mean taking your loan to all the Banks and asking for the best rate. This means ensuring that your business is of a sufficient quality that multiple Banks would want to have you as a customer.    In other words, create something that a bank would like to buy.

Don’t let your business get to a place where you are “marooned” with one Bank. But also, don’t worry if you’re in this camp - many farmers will be right now – but careful navigation around the current situation and creating a plan to move into a better level of credit risk over time is important.

 

3. If all of this feels like the Agri Debt market is pulling in different directions, all at once – you’re right.  

The Agri market for banking requires a very specific set of skills to navigate successfully. 2024 may well throw up the most “imperfect market” for Agri loans that we’ve seen yet.   The difference between yes or no, or the vast range in interest rate that the market will deliver will have significant ramifications on your business.

 

And if all of this seems a little too hard, drop NZAB a line.

NZAB was created to bridge the gap between farmers and their Bank.

New Zealand has some of the best farmers in the world. In a highly regulated and complex finance industry that continuously evolves, we ensure our farmers are informed and empowered to ensure they stay at the top of their game.

We’d be happy to show you why we’re the leading provider of Agri Finance advice across New Zealand. We use our scale, influence and experience to get our farmers the most competitive finance solutions they deserve.

 

Go to our website at www.nzab.co.nz for more, fill out this form, or call/email us direct on 0800 692 212 and info@nzab.co.nz

 

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Why Doesn’t Kiwibank Lend to NZ Farmers?

Nov 15, 2023 1:12:25 PM / by Andrew Laming posted in Debt, Action, Planning, Budget, Banking, Strategy

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Information only disclaimer. The information and commentary in this email are provided for general information purposes only. We recommend the recipients seek financial advice about their circumstances from their adviser before making any financial or investment decision or taking any action.

Kiwibank has been nothing short of a success.

It was initially set up in 2002 as a brainchild of the Alliance MP Jim Anderton, who was in a coalition government with Labour at the time, with a purpose of establishing a locally owned bank with profits that stayed in New Zealand, rather than headed overseas.

A quick tour of its history shows that from day dot, it launched over 200 branches nationwide, partnering with (and ultimately owned by) NZ Post. By 2008 it had grown to 600,000 customers, campaigning on “joining the movement” (i.e., away from Australian owned banks) and winning new customers on stronger customer satisfaction.

It continued to grow and in 2016, NZ Post sold 47% of it to NZ Super and ACC.   Fast forward to 2022, and the entire business was purchased from the syndicate by the New Zealand Government for an estimated $2.1bn.

As of June 2023, Kiwibank has total assets (loans) of $29.7bn, giving them a 5.62% share (on a "dollars lent” basis) of all New Zealand main bank lending. It also continues to head in the right direction, up from 4.39% five years ago. That’s impressive growth.    

Profitability is OK, but not as good as the Australian banks. Return on equity of 6-7% lags the main other banks who typically average about 12-15% (Return on equity (ROE) is the ratio of profit after tax to average equity).

Interestingly, their net interest margin is slightly higher than most banks at 2.5%, meaning they’re highly effective at using deposits to earn income (the net interest margin (NIM) is the ratio of net interest income to average interest-bearing assets, where net interest income is income received less income paid).

Why their profitability of their business lags versus others (on a ROE basis) is probably due to the operating expenditure being much higher at 65% of total income, versus their peers at 40-50%.   This may be symptomatic of a growing business and a larger number of smaller accounts.

Home loans are the biggest part of Kiwibank, but Business banking is rocketing up.

 

Below is the makeup of Kiwibank’s assets (loans) – from five years ago until today.

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We Need to Have a Serious Chat About Foreign Direct Investment into New Zealand Agriculture

Nov 3, 2023 8:39:08 AM / by Andrew Laming posted in Debt, Action, Planning, Budget, Banking, Strategy

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Information only disclaimer. The information and commentary in this email are provided for general information purposes only. We recommend the recipients seek financial advice about their circumstances from their adviser before making any financial or investment decision or taking any action.

Foreign direct investment (“FDI”) into New Zealand agriculture has been a political hot potato since it became a significant election issue in 2017, leading to material changes in OIO regulations, materially restricting FDI into New Zealand farmland on the back of it.   The regulations enacted at the time had the effect of restricting any investment into New Zealand land that was >5ha in size, with exceptions carved out for minority stakes in entities that hold land (<25%) and also those that deliver significant economic benefit to New Zealand (something that has been subsequently difficult to obtain as an exception).

However, the majority of economic data suggests that foreign direct investment (FDI) is advantageous to those countries that receive it. FDI promotes efficiency by enabling the allocation of resources to their most valuable purpose and introducing innovative technology and managerial methods that stimulate competition for resources, increase business revenues and enhance productivity growth.

In short, it creates more economic prosperity.

With the imminent change of government, plus the growing need to ensure New Zealand remains a high value economy in the future and funds all its necessary infrastructure upgrades, the discussion on FDI is about to amplify.

Let’s start this discussion with a graph. Below is all foreign direct investment since 1990 into New Zealand as a percentage of GDP compared to our nearest neighbour, Australia.  

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The NZAB Banking Dashboard: To June 2023

Oct 5, 2023 11:42:07 AM / by Andrew Laming posted in Debt, Action, Planning, Budget, Banking, Strategy

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Information only disclaimer. The information and commentary in this email are provided for general information purposes only. We recommend the recipients seek financial advice about their circumstances from their adviser before making any financial or investment decision or taking any action.

We’ve dived back into the RBNZ data to see all the main bank movements over the last six months - all the changes in lending, who’s winning market share and who’s losing it in both the Agri and Business Lending Sectors.

In this Issue:

  • The big slowdown in credit growth continues with half the lending growth over the last 12 months than we saw in 2021 and 2022.
  • A turnaround for Agri lending with over a $1Bn in new lending to the sector over the last six months on the back of stronger bank appetite, but also the build up of overdrafts with falling payout and increasing costs.
  • ASB and Rabo continue to grow their market share strongly, with ANZ's endless march downwards continues, shedding a whopping 80bps of lost market share over the last 12 months.
  • And on performing loans still quite low, a sign of relatively good credit in the sector. However, we would expect these to grow significantly over the next 12 months. There's now also one bank whose non-performing loans in Agri are actually lower than their total book as a whole, this could be a sign of too weak credit appetite or are they simply are well prepared?

As always, please sing out if you have any questions or would like to use the data in your own presentations or engagement with customers.  

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A Further Look at Agri Interest Rate Margins

Sep 6, 2023 11:56:34 AM / by Andrew Laming posted in Debt, Action, Planning, Budget, Banking, Strategy

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Information only disclaimer. The information and commentary in this email are provided for general information purposes only. We recommend the recipients seek financial advice about their circumstances from their adviser before making any financial or investment decision or taking any action.

We thought we should follow up on an article we wrote recently about the banks subsidising their shrinking home loan margins by expanding Agri and Business margins to maintain (and even grow) their profit. Indirectly, those actions lead to a profitability drag on the Agri and Business sectors – all to the benefit of ensuring that home loan activity remains more buoyant, which is an easier place for the banks to lend.

The article was featured in The Farmers Weekly with some comments from banks offering divergent views on this.

We were then fascinated to subsequently see two main banks, when reporting their results, talking about the intense competition driving home loan margins in New Zealand to unsustainable levels.  

One direct quote was that ‘pricing conduct in the New Zealand home loan market is “difficult to reconcile” and offers “unsustainable returns’

Also“[the] margin on new home loans is currently less than half of what [the bank] gets in Australia”.

What’s really interesting is now taking those comments in the context of overall bank margins in New Zealand.   See the graph below, which is taken from RBNZ data showing the total “net interest margin” for all banks' loans over the last three years. This is the combined margin for all lending that banks do – Agri, Business and Home Lending.

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