Provisioning by banks for the impact of the coronavirus crisis is likely to have been considerably smaller in the June quarter than the huge provisions they made in March.
That's according to a graph presented by Reserve Bank deputy governor Geoff Bascand during a speech to banking industry representatives.
The graph shows bank impaired asset expense falling from very low monthly levels between January 2019 and February 2020 to more than $600 million in March and then shrinking to less than a fifth of that in April, May and June.
RBNZ data shows New Zealand banks made $2.3 billion in collective provisions against potential bad loans in the March quarter, on top of $436.2 million in specific provisions and $2.82 billion in actual non-performing loans. For most banks, their non-performing loans were well under 1 per cent of their total lending books.
The collective provisions were up $570 million from December 31 while individual provisions were up $59.1 million.
"Banks are trying to work out how much of the losses they should account for now" and there is continuing debate on whether their covid-19-related provisioning will be sufficient, Bascand said in answer to a question about banks' provisions.
New accounting standards require banks to estimate and provide for likely future losses but Bascand said he wasn't offering any comment on whether or not bank provisions were sufficient.
Falling net interest margins
The graph showed bank net interest margins falling from more than 2 per cent in January to approaching 1.95 per cent in March and heading down near 1.75 per cent in June as a result of current very low interest rates hurting bank profitability. The RBNZ's official cash rate is at 0.25 per cent.
At the urging of the RBNZ and the government, banks have been offering both retail and business customers the opportunity to switch loans to interest-only terms or to defer payments altogether for a period.
Bascand provided figures showing $20.6 billion of residential mortgages have deferred both principal and interest payments and another $18.3 billion had moved to interest-only payments, totalling 14 per cent of banking sector mortgages.
He acknowledged that initially there had been "some confusion" among bank mortgage customers that deferring all payments would add to how much they owed. Banks had worked hard at explaining the implications and there has been "quite a reasonable lapse rate" of people voluntarily exiting deferred payment arrangements.
Weekly lending flow figures Bascand provided showed the move to interest-only or total deferred payments peaked in the week of April 10 at more than $13 billion but had fallen well below $1 billion by late May.
The RBNZ will be making a statement in about a week, or 10 days at most, on how banks should treat these loans when calculating capital, Bascand said. A note to his speech said that "ordinarily, these loans would have been treated as non-performing with the consequence that more capital would have been needed. This would, in turn, limit a bank's ability to extend loans and reduce credit availability."
Able to absorb losses
NZ banks are well-capitalised and should be able to absorb covid-related losses "but we see stresses rising and losses continuing to mount," Bascand said in his speech.
Banks had been considerably stronger going into the coronavirus crisis than going into the global financial crisis.
Bank equity had been 7.9 per cent of risk-weighted assets in March 2008 but 13.4 per cent in March 2020 while mortgages with loan-to-valuation ratios above 80 percent had accounted for 23.5 per cent of bank mortgage books in March 2008 but only 7.1 per cent in March 2020.
In the written version of his speech – Bascand said he was skipping sections in his actual delivery – he said that "the deterioration of asset quality will likely mean further loss provisioning will be needed.
"This could weaken banks' capital positions," but the RBNZ has initiated stress tests to assess the banks' resilience to a significant worsening in the economic outlook.
"Modelling suggests that under severe – but plausible – scenarios, banks are likely to maintain capital ratios above minimum requirements," the written speech said.
"However, there remains considerable uncertainty about the future trajectory of the pandemic and how this will affect the NZ economy. Under severe enough scenarios, the viability of banks would come into question."
Among a raft of measures aimed at assisting banks to continue lending through the crisis, the RBNZ postponed the start of the phase-in period of its new capital rules for at least a year until July 1, 2021.
Announcement by year's end
Bascand said the RBNZ will announce in the December quarter whether it will extend the start date further.
The new rules will be phased in over seven years and will require the big four Australian-owned banks, which account for about 88 per cent of the NZ banking system, to lift Tier 1 capital from a minimum 8.5 per cent currently to 16 per cent, although 2.5 per cent of that can be preference shares rather than common equity.
The smaller banks will have to lift their tier 1 capital to 14 per cent but will need only 11.5 per cent of that to be common equity with the other 2.5 per cent permitted to be preference shares.
The emphasis of Bascand's speech was that the RBNZ wants banks to continue lending to help lessen the impact of the crisis on the economy.
"A financial crisis and 'credit crunch' on top of an economic crisis would be hugely disruptive for New Zealanders' wellbeing," he said.
"A key determinant of the success of NZ's economic recovery to come will be the willingness of banks to lend to productive, job-rich sectors of the economy.
"The banking sector could choose to hunker down and seek to ride out the storm until the good times roll around again. Or it could continue to step up and play a crucial part in supporting NZ's economic recovery."
Bascand acknowledged that credit conditions have tightened since lockdown but said that demand for loans has fallen more than banks' willingness to lend – the central bank published the results of a survey of banks earlier this month which showed just that.