KEY POINTS:
The international credit crunch will sock New Zealanders with a one-two punch of higher interest rates and a return to the bad old days of going cap-in-hand to your bank for a loan, head of banking and finance at KPMG, Godfrey Boyce, said today.
Releasing the accounting firm's
annual review of banks, he said the global crisis had resulted in a paradigm shift in banking - the days of easy money had gone.
"New Zealand's major banks will react to the fallout from the American sub-prime mortgage crisis by curtailing lending," Mr Boyce said.
"The prevailing wisdom has been that New Zealand will largely escape the fall-out from the sub-prime mortgage crisis."
But that was far from the case. Local banks had funded 30 to 50 per cent of a massive lending spree from offshore and the credit crisis meant investors would only offer more credit at a much higher price.
Lending by banks increased a massive $34.5 billion, or 16 per cent, last year. That tap had largely been turned off.
In the year to February 29, an extra $14 billion had been raised domestically by banks, but that had come at the expense of the finance company and fund industries and would not fully replace the shortfall.
Because banks had funded so much mortgage lending from offshore, Mr Boyce believes even a drastic rate cut of 2 percentage points by the Reserve Bank (a highly implausible scenario) would have little effect in reducing lending rates.
Higher lending rates were here to stay.
Mr Boyce said banks had already curtailed lending.
If domestic conditions deteriorated more and offshore funding markets did not improve, New Zealand banks' ability to lend would be further constrained and credit rationing may be necessary.
"That would clearly be detrimental to the overall economy."
Mr Boyce said the economy would inevitably be affected.
Bankers were already behaving differently to customers.
"Banks that have rolled out the welcome mat to customers are now insisting that appointments are necessary and the business case needs to be watertight."
Banks had far less appetite for lending to new customers unless it was part of a wider banking relationship and the customer and their credit history was known and understood. Lending policies were being strictly enforced and front line lending staff now had little, if any, discretion to vary terms and conditions of lending.
Some banks had applied the brakes hard already while others had done so with a light touch, but there was potential for industry to have to slam the anchors on hard.
"It is quite worrying," Mr Boyce said.
The survey found a number of banks had already recorded increases in arrears and impaired assets, albeit from a very low base.
Merger and acquisition activity would dry up with the banks having no appetite to fund such ventures.
Credit risk management units are expected to have a busy year.
Mr Boyce noted the depth of credit management capability in New Zealand banks had not been tested since the early 1990s and was something of an unknown quantity.
Businesses would see lending rates rise as current margins were unsustainable. That would result in businesses investing less.
The contraction in disposable incomes would affect small and medium businesses and these would find banks less accommodating than they had been in the last decade.
Institutions with relatively more experience and capability in liquidity management and financial risk management would be in a position to take advantage.
Mr Boyce said that as those on fixed mortgages went from 7 to 9 per cent rates, there was likely to be an upswing in the sale of baches and boats.
Those investing in rental properties were likely to sell as they faced higher interest rates, static rents and the prospect of no capital gain.
- NZPA