New Zealand has made a strong recovery but is not out of the woods yet, the chief executive of ASB Bank says.
Vittoria Shortt told the Waikato University Economics Forum today that when Covid hit the initial focus of the bank was making sure it helped with the flow of credit.
"We had to balance carefully the flow of credit into businesses and households but at the same time having an eye to responsible lending and making sure it was the right decision for the long term."
Shortt said it was a balance of debt but also helping businesses recapitalise, shore up their balance sheets and have more resilient settings.
She said the crucial thing was that jobs were saved.
"Initially there was a lot of fear about people losing jobs, that dissipated quite quickly."
Shortt said that had been the most distinguishing factor of this recovery.
"I hear it all the time from customers - those wage subsidies really helped give employers the confidence and courage to retain employees, despite the fact they had little idea how this would play out."
She said lower interest rates and loan payment deferrals also played their part.
"We have had a strong rebound in retail spending and housing. But the reality is this level of activity can't be sustained and we are anticipating this year to be a lot more moderate."
Shortt said this crisis had been very unusual compared to the global financial crisis, which was about the lack of funds to support the economy.
"We have learned a lot since then, banks have gone into this crisis well capitalised, liquidity is strong so there hasn't been that same challenge."
ASB had supported more than 35,000 customers with relief on $11 billion at the peak last year.
"That was a lot of work to get that into place - but the availability and pricing of capital wasn't the issue."
But she said around 15 per cent of those customers were still on support arrangements.
"I think it is very important to recognise that while the recovery in New Zealand has been really positive we are not out of the woods."
"A lot of support is still required and we know globally borders are still an issue, vaccines are an issue, new strains are an issue and we are seeing some double-dip recessions in large parts of the global economy like Europe."
Shortt said there had been unprecedented changes to monetary policy over the past year.
"With the OCR [official cash rate] being cut to as close to zero as the RB [Reserve Bank] felt comfortable doing. Large scale quantitative easing to keep those interest rates low. We have seen great initiatives in the funding for lending programme."
"And while I very much hope it doesn't come to this we also have an industry that is now ready for negative interest rates should that be required."
But she said monetary policy was a blunt instrument and although it had been very effective it had also created challenges.
She said businesses had yet to respond to the availability of low cost loans.
"Even though there is a lot of credit available, the price of credit is extremely low in comparative terms, that is not enough to encourage businesses to take next step forward. I think that is first thing we are keeping an eye on."
She said low deposit rates were also a worry as some people were reliant on the income earned.
The bank was also seeing large unusual balances sitting in accounts driven by lower levels of spending and government support.
"There is around $39 billion worth of additional deposits sitting in the system at the moment as a result of those two factors. "
"One of questions we keep asking is are those deposits stable? Will they flow out as fast as they have flowed in?
"So we need to be very careful about how we think about those deposits when we manage our balance sheet settings as a bank."
And she said the issue that everyone knew about was the rising housing market.
"The low interest rate environment has absolutely stimulated huge housing demand."
Shortt said last year ASB bought back loan-to-value ratio restrictions at 30 per cent for investors ahead of its reintroduction by the Reserve Bank and had recently increased it to 40 per cent. But that had yet to dampen demand.
"We have not yet seen the impact of that change either. We are really struggling with the home loan applications that remain at record volumes."
She said the bank was interested to see what the next steps would be from the government adding housing to the Reserve Bank's mandate.
"We are talking about debt to income ratios, interest-only as another point of discussion.
"What I will be really focused on is it needs to be orderly. The only thing worse than the current situation is if we had unorderly impact. So we need to be very careful when we make these changes and adjustments."
Shortt said there had been more volatility than ever before in the past year and she would like to New Zealanders and businesses become more resilient.
Over the past two years the bank had been partnering with a university on a financial wellbeing framework using behavioural data from customers.
She said over the past 12 months it had shown a reduction in spending by 17 per cent and an increase in saving of around 4 per cent.
"But worryingly over last couple of months we are seeing different patterns emerge.
Two things it was watching closely was people having more difficulty making payments and fewer customers with rainy day savings of at least $1000.
"They give us an indication, it comes back to we are not out of the woods yet, we know some businesses and some people are still doing it really tough and New Zealand still needs support to get through this crisis."