7 Takeaways from ANZ’s Submission on Banking Competition

ANZ has welcomed the opportunity to be part of Parliament's Finance and Expenditure Select Committee Inquiry into banking competition. Below are seven key takeaways from ANZ's submission.

1. Well-run and well-placed

Back in 2019, few could have foreseen how the last five years would play out. It’s been a period of change and disruption - from a global pandemic to closed borders and the freezing of international supply chains.

We’ve seen high inflation and interest rates, major wars in Ukraine and the Middle East, a major flood in our biggest city, and a cyclone that took lives and devastated homes and businesses.

During this period, New Zealand’s banks have played a crucial role in bolstering our economy and providing robust financial support and assistance to Kiwis.

Our banking system is well-run, well-capitalised, well-funded and well-regulated. This means we’re well-placed as a country to weather the many local and international crises and financial storms we face.

That’s a tribute to successive governments, regulators, and bank shareholders. It’s also thanks to the resilience of Kiwis – something we should never take lightly.

2. Investing in New Zealand

We’re a small country with a small population, isolated from trading partners and heavily reliant on the rural sector and tourism. This means New Zealand is exposed to external influences, and like many parts of the world, increasingly exposed to the impacts of extreme weather and natural disasters.

In our experience, shareholders and investors take these factors into account when they assess the risk and return of their investments.

For example, when it comes to borrowing money on the international wholesale markets, New Zealand banks pay on average between 5 and 30 basis points (0.05-0.30%) more than their Australian parents.

Banks need to make sufficient returns to attract capital so we can provide funding to our customers.

ANZ has invested $17 billion of capital in New Zealand. Investment which provides the means to raise many more billions on the wholesale market to help Kiwis into homes, start and run businesses, and trade with the world.

In return for that $17 billion investment from our shareholders, we make around $2 billion a year in net profit after tax. While that is a big headline number, it is about a 12% return on equity, which is middle of the road for a publicly listed company in New Zealand and effectively the same as the average return of comparable banks overseas.

ANZ has more of that capital invested in New Zealand businesses and farms than home loans.

Bank loans are weighted against risk. The higher the risk of an asset, the more capital is required to back it. So, looking at the total amount of lending to different sectors doesn’t necessarily show that a bank has favoured one over the other.

Home lending makes up 65% of ANZ’s total lending but makes up just 41% of the total risk-related capital the bank must invest.  Agri and business lending makes up 31% of ANZ’s lending but makes up 51% of the risk-related capital.

It’s true that lending to home loans has grown in recent years, but we believe the change in mix is primarily driven by economic factors, rather than the Reserve Bank’s capital requirements.

3. Transparency on pricing

Our agriculture bankers, many of whom have firsthand farming experience, are dedicated to helping farmers succeed. They forge deep, enduring relationships with their customers, often spanning decades.

With over 200 relationship bankers serving customers across 23 regional sites, ANZ is steadfast in its commitment to rural communities.

We’ve heard from our customers and through both the Primary Producers and Finance and Expenditure Select Committees that farmers want more transparency around pricing and individual risk profiles. 

We’ve committed to this and are doubling down on the training and coaching we already give our staff to bring this to life for our customers. We’re also developing materials to ensure clear information is readily available to all our customers.

Agriculture isn't just another sector—it's a cornerstone of the New Zealand economy. That's why we're fully committed to bolstering the sector - both small and large-scale farmers - now and well into the future.

4. How RBNZ’s capital requirements impact loan pricing

Our agri business lending is priced for individual customers – lower-risk agri customers pay lower interest rates than higher-risk agri customers.

In our submission we’ve used fictitious examples to help explain this approach to pricing.

Farmer A represents a typical lower-risk customer – running a farming business that has been consistently profitable in the last three years, with low debt and 60 - 70% equity in the business. The farming business is consistently managing liquidity within pre-arranged debt limits.

In this case the risk-weighting and level of capital are at a similar level to that of a home loan, and pricing would reflect this comparable level of risk. To receive the same return as we would on a home loan with an interest rate of 6%, the interest rate for Farmer A would likely be 6.15%.

Farmer B represents a typically higher-risk customer. With a farming business that has made a loss in two of the past three years, their debt is higher, and they have 30% - 40% equity in the business. They’ve needed to increase seasonal limits on their lending and at times been above the pre-arranged limits on lending facilities.

In this case, we hold almost four times the amount of capital in comparison to a home loan due to the relative risk factors. This means that a higher interest rate would be needed to be charged by a bank to generate the same level of return. In this case to receive the same return as a home loan with an interest rate of 6%, the interest rate for Farmer B would likely be 8%.

5. Average interest rates

When you look at the average interest rates across our lending, the difference is not as significant as commonly perceived.

For fixed rates, the average interest rate for new and repriced loans for August 2024 is 6.66% for home loans, agri lending is 7.13% and business lending is 7.87%.

For floating rates, the average for new and repriced loans for August 2024 is 7.99% for home lending, agri lending is 7.94%, and business lending is 8.35%.

On average our farming customers do pay more than homeowners for lending, however our agri lending portfolio delivers lower returns than our home and business lending portfolios.

6. Overdrafts and debt facilities

An overdraft helps with day-to-day cash flow needs and, for our agri-business customers, can also address seasonal cash flow requirements.  Around 80% of farmers have an overdraft, however overdrafts account for just 2% of our agri lending.

A properly functioning overdraft facility will show balance fluctuations that align with the business’s cash flow cycles. 

Occasionally, customers use overdrafts to purchase capital items without our knowledge.  

When a customer does this, we strongly advise—and prefer— that a specific portion of the lending is converted into a term loan, with an appropriate repayment plan. This approach would then restore the overdraft limit, ensuring adequate flexibility for cash flow requirements.  

Our bankers are always open to how we can streamline debt structuring for our farming customers and encourage them to discuss this with us. 

7. Climate

International consumers, producers and trading partners are increasingly demanding sustainable products and information from global food and fibre businesses. This demand is an opportunity for New Zealand farmers and agri businesses.

At this stage we have not set an emissions reduction pathway and target for the agri sector. Instead, we are seeking a deeper understanding of the options for farmers and are working on ways we can help them lower emissions from their farming practices.

We’re committed to working alongside our farmers and farming businesses as on-farm practices and technology evolves.

ANZ NZ has welcomed the opportunity to contribute to the inquiry. We think it’s a good opportunity to have an evidence and fact based look at the industry, including the operating environment and regulations.

You can read ANZ's full submission to the Finance and Expenditure Select Committee Inquiry into banking competition HERE.