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.

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.

With the ongoing Inquiry into Rural Lending, one of the central themes from both the RBNZ and the Banks is that Agri Lending is ‘riskier’ than Home Loans so therefore a higher margin needs to be charged to justify the lending.

Two things have now happened over the last 10 years. Firstly, the Banks have increased the price of their loans, but perhaps more importantly they have also reduced the risk they take at the same time.   

Let’s unpack that statement a bit more.

A Bank considers two main factors when looking at a loan. Firstly, what is the likelihood that things will go wrong (i.e. default) and secondly, how much of the loan that they will be able to get back if things do go wrong. When a loan does go wrong, the Bank assesses how much they might lose on the loan, and this is referred to as a ‘credit impairment allowance’ or an ‘individual provision’.  

Now, it’s very important to note that an individual provision (an ‘IP’) doesn’t necessarily turn into an actual loss, the Bank just thinks it might.

From experience, banks prefer to budget or ‘provision’ a higher number than they actually do lose, as they don’t like surprises.

Banks don’t publicly report the actual losses they make so we can only use the IP data as a proxy for this detail. However, it was telling when Antonia Watson, CEO of ANZ, was asked at the banking inquiry how many defaults they were running in their Agri loan book. Her answer - “Just two” – in over $15bn of loans.

So, let’s look at the data. The graph below shows the level of total annual bank Agri IP’s (Main banks + Rabobank + Heartland) as a percentage of their total advances since 2018.

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.

When we made our submission to the Rural Banking Inquiry, we went back into the RBNZ data to look at how each main banks' Agri Lending market share has changed over the last six years.

The changes in market share are really telling, but what’s more interesting is the actual dollars that have been lent (or as the case might be, haven’t been lent) when looking at other sectors such as home lending.

Let’s look at the graph of the market share first:

Nicola Willis announced in June that the Finance and Expenditure Committee would be adding Rural banking to the inquiry into banking competition in New Zealand. In particular she noted that: "growing the rural economy is critical to rebuilding New Zealand's economy and with farmers satisfaction with banking services dropping in recent years, its critical we better understand the role of bank competition in that sector".

This followed an earlier process run by the Primary Production Select Committee to which NZAB was asked, among others, to provide a submission and subsequently present in person.

As part of this new inquiry, the New Zealand Government wants to delve deeper into the reasons why the cost of banking is much higher for business and rural borrowers and examine the effects it's having on the New Zealand economy.

NZAB recently made the below submission to the Finance and Expenditure Committee.  As this is a public process, we thought it would be useful to share our submission with our wider farming and farm professionals’ audience.

It covers a brief summary of some of the issues as we see them, but also offers some practical solutions that the committee might consider to improve farmers access to capital and have a positive impact on New Zealand’s ability to increase exports, close the current account deficit and continue to maintain New Zealand’s relative GDP vs its peers.  

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