Growth = Risk + Finance + Opportunity

11 Dec 2019 Growth = Risk + Finance + Opportunity image

No one in the food and fibre industry is risk-averse.  Growers and farmers face many risks every day as they strive to deliver their product to market.  More frequent extreme weather events, falling product prices, increasing and costly regulations, the struggle to find reliable workers, and the challenge of getting products to market are some but not all of the risks. 

Being a grower and a farmer is not for the faint-hearted.  It is also not for those that cannot manage risk, especially when a decision is made to expand and more risk is taken on. 

Without access to capital and finance, there can be no expansion.  Dealing with banks is becoming a very vexed issue.  Across New Zealand, the banks that lend money to the rural sector are tightening up their lending requirements and making it harder to access capital to take advantage of opportunities. 

Let's be clear.  The banks are not taking on the same level of risk that the growers are.  Banks demand security and throughout this year, they have increased the security that they demand to reduce their risk.  As a result, the opportunity for the rural sector to expand has been reduced.  This situation is for new loans as well as for the renewal of existing loans. 

One reason given by the banks for tightening up on rural lending is the much heralded and debated new Reserve Bank requirement for banks to hold more capital.  This requirement is to protect against a one-in-200-year banking calamity, like the 1930s depression. 

But here’s the fallacy: banks think they will be able to help an ailing economy by having lots of money in their vaults.  Wrong: to stimulate and maintain growth, money needs to be out with the people who make money, like growers and farmers. 

So, by requiring more capital, the Reserve Bank is not supporting growth.  Proof of this is that even before the Reserve Bank made its final decision, the banks were tightening their lending.

For the big four Australian-owned banks (ANZ, ASB, BNZ and Westpac), the new Reserve Bank requirement will mean almost doubling the amount of ‘Tier 1’ capital they hold. The Reserve Bank has predicted this will cost all New Zealand banks around $20 billion. 

Concerns have been raised that the Australian-owned banks will withdraw investment from New Zealand.  But as former finance minister and prime minister Bill English said early this year, ‘Australian shareholders and Australian banks do very well out of New Zealand. They generate good returns. I think they will stick around.’

New Zealand is one of the most profitable countries in the world to run a bank. The big four banks made a $5 billion profit in 2018, with an average annual return on equity of 18.4%.  So not to put too fine a point on it, any offshore owned bank exiting New Zealand would be rapidly replaced by another bank and the exiting bank’s shareholders would be earning less of a return.  I don’t think this is going to happen. 

But what is happening is New Zealand’s growth has been slowing for a number of years.  Our economy grew by only 2.1% in the past year, the slowest rate since 2013.  As a result, the Government is looking to borrow and inject spending back into the economy. 

This is a sensible move but not one that is being replicated by the Reserve Bank and the trading banks.  Indeed, they are doing the polar opposite, which is already having a negative effect on rural investment.  What’s the sense in that? 

Mike Chapman, Chief Executive