ANZ Group chief executive Shayne Elliott talks mortgage rates, recession and the big challenge ahead for the banks. Photo / Dean Purcell
When ANZ Group chief executive Shayne Elliott thinks about how Australians might cope with rising mortgage rates, he looks to the bank's New Zealand business.
"This is massively over-simplistic, but we see New Zealand as an extreme version of Australia," he says.
Elliott, a Kiwi who has headed the Australian-listed bank for the past seven years, says New Zealand is a narrower, more exposed economy than Australia.
"Therefore, when things happen, they happen in a more extreme way."
He points to property prices that rose faster in Auckland last year than they did in Sydney and Melbourne.
Likewise, inflation is higher here than across the ditch and unemployment has come down faster.
And the measure that banks all pay close attention too - the central bank's cash rate - is higher here at 3 per cent compared to Australia's 2.35 per cent.
"New Zealand started raising rates seven, eight months before Australia. From our perspective, being selfish at ANZ, when we are thinking about Australia we do have a crystal ball and the crystal ball is called New Zealand."
Elliott, who was in Auckland this week as part of an ANZ Group board visit, says the bank is looking closely at whether Kiwis are still able to afford their mortgages, how small businesses are faring and what industries are under stress.
"We are able to use that. At the moment the underlying trends, pressures, stresses are the same with a slightly more extreme case here. That is why a lot of commentators, analysts and people who follow the markets are really interested in what is happening in NZ as a lead indicator of what is likely to come."
So far the news is good.
Elliott says that despite the pressure on the economy, as New Zealand households go into this period of stress, they are starting in really good shape.
"They have got high savings balances, they are confident about keeping their jobs which is a good thing. So people are going into this space in a robust, resilient way - that is not to say there won't be some that really find themselves in harm's way. But it looks like it is a relatively small part of the population."
Elliott says despite the interest rate rises, people are coping and able to modify their lives.
"That is not to say we are complacent - we are really looking at those people at the tail, on the edge."
He admits there will be some who come under stress, but in the main, people look able to weather the storm.
Elliott also points to the fact that while mortgage rates have risen fast, they still remain low in historic terms.
"Rates have gone up from an extraordinarily low point but, over history, where rates are today or even where they might be in the next year is still relatively low compared to where they have been historically."
Economists have mixed views on whether New Zealand will go into a recession. At ANZ NZ, the bank's own economists have predicted New Zealand will avoid a technical recession - classified as two consecutive quarters of negative growth in the economy.
Elliott says he has some sympathy for US President Joe Biden's view which says technically you might say it is a recession, but it doesn't feel like a recession because people have jobs and money.
"There are some that are in a difficult position. But it doesn't feel like 1992."
He says central banks are in a difficult place trying to squash inflation.
"Central banks have this challenge and I don't envy them. There are lots of moving parts that are largely out of their control - things like the oil price, which is lots to do with the dreadful situation in the Ukraine. There are all sorts of factors there that are completely unknowable and unpredictable, that are all over the place, and that are having impacts on food prices and other things - and you are trying to moderate the economy by raising rates and try to take some heat out."
Elliott says there is a chance that central banks will get it wrong and over-tighten.
"Even if we did end up technically in a recession, I would imagine for a lot of people it won't feel like it. People have jobs, incomes are rising faster than they have for a long period of time. I think it will be shallow recession in the way that it is felt by the population."
For many businesses, the problem is still finding enough people to hire, rather than the opposite issue: reducing staff numbers.
Elliott says that is a good thing in many ways.
"It is remarkable we are sitting here in 2022 talking about businesses not being able to open because they can't find staff.
"That is quite a remarkable shift in a relatively short period of time. One would question what is everybody doing? I'm not sure I can answer that."
While the labour shortage will be a handbrake on growth, he says, it isn't the worst problem in the world.
And he isn't convinced immigration will solve it either.
"Everybody says the answer is immigration - we should open up and go back to that. I'm sure that is partly the solution. I think the difficulty is, if you go back over the last 10 years when Australia and New Zealand were very open to migration and benefiting enormously from people coming, there was a push and a pull factor - people want to come to NZ and Australia."
He says that push to move from other parts of the world experiencing unemployment isn't the case at the moment.
"This low unemployment is almost a global phenomenon now - I'm not so sure it is as simple as that - I think ultimately it will cause a lot of businesses to think about productivity."
That could mean turning to robotics to solve the labour shortage.
"I know there are a lot of businesses trying to find a way to reduce their dependency on labour."
For ANZ itself, Elliott says the biggest challenge is remaining relevant for its customers in a new world of technology where there are much higher consumer expectations and much higher regulatory expectations too.
"I've worked in banking in 30 years. All of those things have changed and it's a good thing. But that is the pressure. How do we continue to service customers when everybody wants to be able to do their banking on this [their phone]. And not just look at their balances and make a few payments, but do quite sophisticated things on their phones."
While it seems easy to offer that service, it's not so simple when you are a banking behemoth.
"It is extraordinarily difficult to do it at scale when you are talking about millions of customers moving billions of dollars."
Elliott says it's not just banks that ANZ is competing with.
"We are competing against global giants, Apple and Amazon who are also muscling into our area. So it keeps us on our toes."
On top of that, community expectations and regulatory expectations are also heightened.
In Australia, the lessons from the Royal Commission into misconduct in financial services is still fresh, while in New Zealand banking has had its own shake-up by the regulators, and institutions will soon have to be licensed for conduct by the Financial Markets Authority.
"The way we deal with customers, how we keep them up to date. How we inform them about the risks of things they are doing. I would say there has been a shift between the responsibility of the bank and our consumers - that line has shifted about who is responsible for what.
"It used to be much more buyer beware - you borrow the money and now you've got to give it back. Now there is a lot more onus put on the banks to say well, hang on, have we lent responsibly?"
Elliott says the challenge with any regulation is the unintended consequences.
"That is not us bleating about it and saying we shouldn't have regulation, of course we should, it is really trying to understand and be thoughtful about those unintended consequences."
He says well-intentioned responsible lending legislation had led to all sorts of unintended consequences in Australia.
Here in New Zealand, lenders have not been happy with changes to the Credit Contracts and Consumer Finance Act and the Government has already loosened some of its measures, with more change due in March.
Elliott says he gives the Government credit for doing that.
"We have seen over time that many governments, once they put something in place are very loath to step back or even modify it. So I think that's a good sign to say hey, look, we have done this - there is merit in having a look and if we need to, tone it down - I think that is a mature approach."
Elliott, who grew up in West Auckland and went to Waitakere College, says he doesn't have any specific plans on a permanent return to New Zealand.
"My family still have a home here and I still consider it my home. I only have an NZ passport. So I don't have anything else to call home. I would love to. I have been really fortunate to live around the world and have a great career. I'm clearly closer to the end of that than the beginning. Hopefully one day."
As to how long he will continue as ANZ Group chief executive, Elliott says that is for the board to decide.
"I have been there a long time - seven years as CEO - in today's world that is long. Who knows? That's really a question for the board and what they see."
PLUS: Some good news for fintechs in the open banking war.