Banks prepare for borrowers to struggle to meet their loan repayment obligations. Photo / File
Banks prepare for borrowers to struggle to meet their loan repayment obligations. Photo / File
Banks are preparing to lose money from borrowers who can’t meet their loan repayment obligations, as high interest rates and the economic slowdown bite.
New Zealand banks collectively increased their impaired asset expenses by $202 million, to $327m, between the December 2022 and March 2023 quarters.
As a percentage ofoperating income, the expense rose from 2.8 to 7.6 per cent between the two quarters.
The jump was mainly driven by banks increasing their provisions for expected losses, according to the Reserve Bank.
Banks increased their provisions substantially when Covid-19 became prevalent in early 2020. The impaired-asset-expense-to-operating-income ratio got as high as 20.8 per cent.
However, they later reversed these provisions, as the economy (supported by a seismic amounts of fiscal and monetary stimulus) came through a period of enormous uncertainty relatively well.
Covid-19 aside, the March quarter impaired-asset-expense-to-operating-income ratio was the highest it’s been since the first quarter of 2011 – when the economy was grappling with the Canterbury earthquakes and the aftermath of the Global Financial Crisis.
While increasing provisions shows that banks are preparing for tough times, independent economist Cameron Bagrie said the focus should be on actual losses or impairments.
Reserve Bank data suggests there was an uptick in borrowers who ran into trouble in April compared with the 18 months prior.
However, at 0.5 per cent, the “non-performing loans to all loans” ratio was the same as what it was in 2019, when interest rates were relatively low and the economy was performing quite well.
Independent economist Cameron Bagrie. Photo / Alex Burton
Over the past five years, this percentage has been between 0.4 and 0.7 per cent.
Non-performing loans include those that are 90 days past due plus impaired loans – ones where banks believe they won’t receive the repayments they’re entitled to.
Breaking down the different types of loans, 0.3 per cent of housing loans were non-performing in April. This portion sat at 1.2 per cent for consumer loans, 0.5 per cent for business loans, 0.3 per cent for commercial property loans and 1.2 per cent for agricultural loans.
While the Reserve Bank has suggested it will likely stop increasing the official cash rate (OCR), former Westpac treasurer turned consultant, Jim Reardon, believed the economic slowdown would surpass the end of the central bank’s tightening cycle.
As more people refix their debt at higher interest rates, he believed further signs of stress would show.
Nonetheless, another dataset one could look at to show how much stress mortgage holders are under – the portion of mortgages that are interest-only – suggests borrowers are doing okay.
Of the $252 billion of mortgage debt owner-occupiers had in April, 8.3 per cent was interest-only. Meanwhile of the $90b of debt taken out by investors, 32.9 per cent was interest-only.
Reardon noted struggling borrowers may opt to only pay the interest on their mortgages for a time, rather than interest and principal.
The above portions are very low by historic standards.
Nonetheless, Bagrie believed the second half of this year and 2024 would be a “tough story”.
“You don’t get rid of inflation unless you beat up the economy a bit,” he said, referring to the Reserve Bank’s aggressive interest rate hikes.
“There is no such thing as immaculate disinflation. It doesn’t go away by itself.”
Bagrie, who used to be ANZ’s chief economist, also made the point that while impairment expenses can go up, banks tend to be able to reclaim their money.
