ANZ defends farm lending rates

ANZ New Zealand chief executive Antonia Watson says the bank has 51% of its capital invested in New Zealand businesses and farms, more than is invested in home loans.

Speaking to Rural News following its annual result announcement, Watson noted that bank loans are weighted against risk.

"The higher the risk of an asset, the more capital is required to back it. So, looking at the total amount of lending to different sectors doesn't necessarily show that a bank has favoured one over the other.

"Home lending make up 66% of ANZ's total lending but makes up just 41% of the total risk-related capital the bank must invest. Agri and business lending makes up 30% of ANZ's lending but makes up 51% of the risk-related capital."

Watson points out that home lending increased from around 59% of total bank lending at September 2019 to around 64% of bank lending at June 2024.

"We believe the change in mix is primarily driven by economic factors rather than the Reserve Bank's capital requirements," she says.

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"In recent years we have had record low interest rates and demand for home lending was very high, house prices increased, and we saw a fear-of-missing-out amongst home buyers.

"During this time, business and agri customers took advantage of lower rates by paying down debt and building more resilience into their businesses. Through the uncertainty of Covid, business and agri customers preferred not to take on more debt. This was followed by higher interest rates which has increased the cost of debt."

ANZ NZ reported a net profit of $2.3 billion for year ending September 30, 2024, a 1% increase over the previous year. Its agriculture sector lending sits at $15.4b.

Banks have come under fire from farmers for charging higher interet rates for farm lending than home loans. A parliamentary banking inquiry is underway with the Government signalling that Kiwis deserves a banking sector that is as competitive as possible.

Watson says that its agribusiness lending is priced for individual customers - lower-risk agri customers pay lower interest rates than higher-risk agri customers.

In its submission to the banking inquiry, the bank used fictitious examples to help explain pricing.

Farmer A represents a typical lower-risk customer running a farming business that has been consistently profitable in the last three years, with low debt and 60-70% equity in the business. The farming business is consistently managing liquidity within pre-arranged debt limits.

"In this case the risk-weighting and level of capital are at a similar level to that of a home loan, and pricing would reflect this comparable level of risk. To receive the same return as we would on a home loan with an interest rate of 6%, the interest rate for Farmer A would likely be 6.15%," says Watson.

Farmer B represents a typically higher-risk customer, with a farming business that has made a loss in two of the past three years, their debt is higher, and they have 30-40% equity in the business. They've needed to increase seasonal limits on their lending and at times been above the pre-arranged limits on lending facilities.

"In this case, we hold almost four times the amount of capital in comparison to a home loan due to the relative risk factors. This means that a higher interest rate would be needed to be charged by a bank to generate the same level of return. In this case, to receive the same return as a home loan with an interest rate of 6%, the interest rate for Farmer B would likely be 8%.

"When you look at the average interest rates across our lending, the difference is not as significant as comonly perceived. For fixed rates, the average interest rate for new and repriced loans for August 2024 is 6.66% for home loans, agri lending is 7.13% and business lending is 7.87%."