Supporting Farmers Through Tough Times

"Agriculture isn't just another sector—it's a cornerstone of the New Zealand economy. That's why we're fully committed to bolstering the sector both now and well into the future."

Lorraine Mapu, Managing Director of Business Banking , ANZ NZ Ltd

ANZ News: A recent survey by Federated Farmers suggests that one in four farmers feel they're facing undue pressure from banks, a significant increase from one in twenty a decade ago. How do you interpret this trend?

Lorraine: It's true that inflation and interest rates have been on the rise, coming off near-record lows. These economic shifts have undeniably created challenging conditions for many New Zealanders, including our farmers. We encourage any customers feeling financial strain to reach out to us. Our priority is to work together to explore the available options and provide the right support.

Feedback from customers and stakeholders, including surveys like the one conducted by Federated Farmers, is important to us. We take it seriously and are constantly looking to improve our products and services. At ANZ, we're dedicated to delivering excellence across the board.

However, if we get things wrong, we're eager to hear about it. We're committed to listening to our customers, understanding their concerns, and promptly addressing any issues that arise. Building trust and fostering positive relationships is at the core of what we do.

ANZ News: Lorraine, according to Federated Farmers, there's a noticeable and growing interest rate gap between home lending and loans to the agricultural sector. How do you account for this?

Lorraine: As a general rule businesses, including farming operations, typically face higher interest rates compared to home loans. This reflects the higher levels of capital and risk involved in the lending. Various factors influence interest rates for customers, including prevailing economic conditions, regulatory policy, and monetary policy.

At ANZ, we carefully consider each customer's unique circumstances when setting interest rates for agricultural lending. A component of that is a customers’ security position and risk profile.

Over the last two years the rising Official Cash Rate, higher wholesale rates, and higher funding costs have driven the levels of interest rates farmers have seen.

The Official Cash Rate has increased from a low of 0.25% in October 2021 to the current rate of 5.50%. Over that same period the average agriculture customer rate has increased by less than 4%, ANZ’s carded floating home loan rates have increased by 4.20%.

Given that many agricultural customers are on variable rates, they feel the impact of rate hikes more immediately.

ANZ News: There's been talk among farmers that banks are increasingly hesitant to lend against equity, and when they do, they often treat it more like an overdraft than a term loan. Can you clarify ANZ's stance on this matter?

Lorraine: At ANZ, we offer a range of banking products to support our customers', including term loans, a Business Green Loan, working capital facilities, and redraw options.

Our dedicated bankers take the time to understand each customer's circumstances and present them with options to make well-informed decisions about the most suitable product types for their requirements.

While a customer's equity certainly factors into our lending considerations, it's just one of many aspects we take into account.

Regardless of equity, it's important banks look to help customers borrow at a level where they can service the debt - borrowing levels should align with their ability to service and eventually repay the debt while maintaining a sustainable operation.

One measure of viability is a business's ability to meet its debt obligations through consistent operating earnings, rather than introducing equity from asset sales.

It's worth noting that overdrafts represent only a small percentage of ANZ's total agricultural lending portfolio, accounting for less than 2% of drawn lending though overdraft.

ANZ News: Farmers have voiced concerns that banks are adopting a harsher approach when it comes to defaults or issues with loan repayment. Has ANZ changed its approach towards customers facing financial difficulties?

Lorraine: At ANZ, our approach to customers experiencing financial pressure or stress remains unchanged. Our primary goal is to work with our customers to prevent financial distress and foster a financially resilient sector.

We're committed to working closely with our customers, offering solutions such as moving to interest-only payments to ease financial strain when necessary.

We have a specialist advisory team comprised of some of ANZ’s more-experienced bankers to support customers who are experiencing financial distress.

This team have experience managing customers through economic cycles and have dealing with difficult financial situations. We work closely with these customers to find viable solutions.

ANZ News: Have changes to bank regulations by the RBNZ resulted in increased interest rates for rural borrowers?

Lorraine: There's been a lot of discussion about the borrowing costs for farmers lately. As I mentioned earlier, interest rates for agricultural customers, like other lending products, are influenced by a number of factors, including economic conditions, regulatory settings, and monetary policy.

The increased amount of capital banks must hold against their lending has also had an impact. 

The risks around the sector impact the amount of capital banks must hold against their lending and, therefore, the interest rates they charge.  Risks include volatility in global export markets, farmgate prices and inflation.

History shows us that lending to businesses, including the agriculture sector, is riskier than lending to homeowners. As a result, we hold twice as much capital against agriculture lending as home lending. Banks reflect the amount of capital we must hold in the price of our lending. 

The RBNZ did a review of capital requirements in 2019, as other regulators globally have. Out of this review, there have been changes to the RBNZ’s capital framework and banks are now required to hold more capital.

The aim is to further increase financial stability and reduce the risk of banks failing.

That extra capital is funded by bank shareholders. Not unreasonably, bank shareholders expect an appropriate return for the extra capital required for the same loan.

The lending interest rate charged ensures an appropriate return when considering the capital requirements along with the operating cost to service customers.

ANZ News: Have these changes allowed ANZ to 'mask' increases to its margins, making it even more profitable?

Lorraine: The Reserve Bank's proposal for increased capital ratios aimed to enhance the resilience of New Zealand's banking system against financial and economic shocks. The RBNZ expected an increase in Net Interest Margins following the implementation of the new capital requirements. 

Their Capital Review Decisions 2019 document the following:

“While we acknowledged that making New Zealand’s banking system more resilient could not be done without cost – namely, an increase in the interest rates that banks charge their customers – we assessed that the benefits of these changes would outweigh the costs.”   

ANZ NZ has actively participated in the Commerce Commission market study into Personal Banking including providing expert opinion on the profitability of ANZ NZ and NZ Banks more generally.

The most appropriate (apples-with-apples) measure of profitability is to look at banks’ return on equity (ROE); and when comparing profitability, selecting the appropriate benchmark or peer group is important.

When comparing ANZ NZ against an appropriate benchmark our average post-tax ROE of 12.3% over the 2010 to 2021 period was materially the same as the average post-tax returns of 12.2% of a valid peer group of international banks.

ANZ News: Farmers claim banks are losing experienced rural staff, with replacements often lacking an understanding of rural banking. Is this true for ANZ?

Lorraine: While I can't speak for other banks, I can assure you that's not the case within our ANZ team. Our agriculture bankers, many of whom have firsthand farming experience, are dedicated to helping farmers succeed. They forge deep, enduring relationships with their customers, often spanning decades.

With over 200 relationship bankers serving customers across 23 regional sites, ANZ is steadfast in its commitment to rural communities. While new staff inevitably join our ranks, they bring fresh perspectives and a genuine passion for the sector. We provide comprehensive training and support to ensure they can effectively meet all our customers' banking needs.