DELL Consumers are feeling more confident than businesses. This is reflective of the unemployment rate and activity in the housing market over the year, which has been quite robust. Businesses are facing shipping, logistical and resourcing constraints caused by the lockdowns but they have been assisted by government payments.

The RBNZ has delivered two OCR [official cash rate] hikes and the market is expecting more – pricing in the terminal rate to hit around 2.5 per cent by the middle of 2023.

But there is still plenty of uncertainty out there – I have heard the word ‘Omicron’ a lot of times in the last week. There are plenty of things that will have an impact as we move forward – we are not out of the woods just yet.

LUCAS The economy is in a strong position. Relative to 2020, retailers and businesses coped better with the Delta strain, doing a lot of work to make sure their customers were resilient throughout. The commodity side of the economy is doing well, with high prices, and the agricultural sector is strong from a lending perspective.

BRADLEY Our observations are very similar to what has alreday been said. Consumers are feeling better than business through this period.

At the same time, higher interest rates and projected future increases means we have experienced a big rise in rate locks and an extension of term.

Business activity is better placed and there is more resistance to drawing down debt. We had access to the business finance guarantee (BFG) scheme last year and we carried on our good-to-grow product, which follows the guarantee. The pipeline was probably half the capacity available, so businesses are clearly yet to gear up investment.

TURNER I echo the sentiment of the rest of the panel. We have seen a slowing in mortgage lending since the latest lockdown began but it is hard to know whether this is due to the ongoing impact of COVID-19 or the tightening of monetary policy. It is probably a bit of both.

On the liability side, we have not seen an accumulation of liabilities anywhere near what was experienced during the last lockdown. Consumers are feeling a bit more confident, whereas last time there was a lot more uncertainty: people were worried and effectively shut up shop.

The counter to this is that maybe we will not experience the same sudden boost in consumer spending when we emerge from lockdown, because consumers have not turned off the tap quite as much.

LUCAS There is a lot happening in the housing market. The RBNZ has been focused on re-establishing LVR restrictions earlier this year as well as the changes coming through in November.

What we have experienced over the year is a switch from investor to owner-occupier demand for housing. First-home buyers were strong at the beginning of 2021, which has recently pulled back – caused in part by the restrictions applying to them. On the investor side, the tax changes that have come through now make holding property more expensive while prices continuing to increase makes it less attractive for them to enter the market.

We have seen an impact on lending but it is hard to determine how much is due to the lockdown. We just saw, particularly in Auckland, a slowing of house sales and this has passed through to bank balance sheet growth rates, which have slowed over the last quarter.

BRADLEY Focusing on some of the restrictions and responsible lending, we found when the Credit Contracts and Consumer Finance Act (CCCFA) came into effect, it took our bankers 50 per cent longer to process applications. The amount completed in a day slowed as they went through the requirements under responsible lending. The backlog meant time to approval extended and it was harder to close deals in the timelines required.

The LVR restriction comes into effect in January 2022. We have seen the banks that go early and close off high LVR lending have that flow shift to other banks very quickly. We are going to start to see banks being a lot harder when it comes to closing down their limits going forward.

On the debt-to-income (DTI) ratio restriction, which is still under consultation, banks are already taking it into account as part of their credit approvals. They are looking to get ahead of the game.

TURNER There will be an impact from monetary policy tightening but it is hard to work out how much is already happening versus the natural slowing we saw during the lockdown. Approximately 60 per cent of GDP comes from household spending. Unless we see some kind of offset through increased government spending, higher interest rates will over time have a slowing impact on the economy. If we are not seeing it yet, I expect we will see it shortly.

DELL We expect the LVR changes to have an impact and we are actually already seeing it. ANZ, among others, has announced that it is not accepting any new applications for more than 80 per cent LVR, on a temporary basis. While the new requirement is that less than 10 per cent of new lending is more than 80 per cent LVR, we will manage to a lower amount than this to ensure a buffer below the threshold.

On the CCCFA, some of the changes only came in a week ago and they are working their way through the system. But the discussions we are having with customers are along similar themes – applications will take longer to progress.

BRADLEY The combination of DTI ratio and LVR restrictions will be interesting. Typically, people with high LVR are first-home owners, so there is a constraint.

High DTI ratio loans are generally investors who will have a low LVR for their own personal balance sheet reasons. We will see a slowdown from these investors due to the restriction. The restrictions will definitely have an impact at both ends of housing demand.

The issue Steve Lucas talked about regarding a slowing market with the high LVR limit is being compounded by the denominator, which is also slowing – it makes it harder to write the 10 per cent of loans allowed to be above 80 per cent. Monitoring this gap will be a key issue going forward.

With higher interest rates, we all do serviceability tests to ensure a buffer of about 2 per cent above our highest rate. But there will be a much higher interest rate component in the stress testing when we are doing our solvency stress test in 2022.

We are, together with the regulators, considering the implications of much higher interest rates on our books and how these affect performance. I am not saying rates will get anywhere near a stress test level, but it is certainly affecting all parts of the industry.

TURNER Any one measure does not seem to have a particularly high impact – it is the combination of measures, plus higher rates, that will affect the housing market.

It has been a raging bull market for the last 18 months. Nothing thrown in its path could stop it. But eventually the combination of all these things will start to slow it down. Access to credit has always been a key driver of the housing market, so as this becomes tighter we expect it to flow through into the housing market.

DELL The central bank has said it is not planning to implement either a DTI ratio restriction or minimum interest rates at this point. A minimum interest rate would be relatively simple to implement if it was required. The DTI ratio restriction is likely to take a little longer to get into the market. This likely needs to be a consideration if there were any near-term plans to implement it.

It is a blunt tool of achieving desired outcome. Just taking an income of NZ$100,000 (US$72,870), there is a big difference between a couple earning that amount and a family of five.

LUCAS A DTI ratio restriction is a relatively blunt tool and there may be concern that it would start to discriminate against some borrowers versus others that have clear lines of income measurable under the standard.

We are also probably looking at mortgage rates well into 4 per cent territory [in 2022]. All these headwinds will dramatically slow housing, particularly as an investment tool. There is limited house price growth potential in future.

TURNER When it was announced, the economy was expected to be in a rough place. The surge in economic activity after the establishment of extraordinary monetary policy tools has meant banks have had to return to more normalised funding patterns sooner than expected.

From a Westpac point of view, it is part of the suite of funding tools we have. But we manage our funding on a holistic basis and look at diverse sources of funding.

DELL Similarly, we have drawn down NZ$1 billion under FLP, and about NZ$6 billion has been drawn down so far in total. But we think about it in the broader context of our funding requirement and managing a range of factors, such as diversity and maturity concentration. A significant range of different factors need to be considered in the broader context of funding.

LUCAS The FLP was put in at a time when we were staring at negative rates, so it is hard to believe 12 months on that we have had several OCR increases with potentially many more to come.

It is a useful tool and I think holding it to maturity is key to ensure the communication and the approach the reserve bank takes on policy settings is consistent and its market creditability remains.

We have taken a different stance on the programme, earmarking the funds for sustainability-linked lending as well as financing of new builds to help increase housing supply. These initiatives have gone well. We launched several products across our business and have drawn about NZ$1 billion in addition to a considerable pipeline. We hope the use of the FLP will help New Zealand as a whole.

BRADLEY BNZ drew NZ$1 billion but we linked it to business lending, which was effectively following on from the demand of the BFG scheme. We have used the residual loan to fund business, not housing or new home builds. If we were to continue using it, we would need to link to a specific cause, like sustainability, or a specific business activity. We have access to overseas and domestic money, so it is part of the funding mix but it is not necessarily a driver within that mix.

DELL It is a return to business as usual funding. We have been to offshore markets a couple of times in 2021 – the US and Europe. Our conversations with investors have been positive on New Zealand’s economy.

The most important discussion is the one about the dynamics of the housing market. The second key discussion has been on how New Zealand has handled COVID-19, given it has been quite different from how other countries have dealt with it.

LUCAS ASB Bank returned to funding markets in May 2021, raising just more than NZ$5 billion, on- and offshore this year. The questions from investors are very similar. There is a lot of focus on housing and probably less on agriculture compared with the past few years.

How New Zealand dealt with COVID-19 has been a big topic with investors. We had investor meetings in September for a recent US dollar deal, which was just as we started a level four lockdown. We advised investors but there was no concern from these groups, which goes to show that they have moved on from COVID-19.

The rest of the world is re-emerging and investors were more focused on the economic prospects of New Zealand and the strength of banks following the changes to the capital regime and implementation timetable.

BRADLEY We wanted to get back into markets as soon as possible – we have a regular programme and investors appreciate the predictability of it. There was a small pause but we were back as fast as possible and this was well received.

Because about 50 per cent of our agriculture book is dairy we historically spend a lot of time talking about cows. Given the performance of dairy recently, this has been a very pleasant experience compared with talking about Auckland house prices. Overall, it was a good return to the market.

TURNER We were first back into the market in February and raised a few eyebrows with that deal. It soon became quite apparent that the other major banks were going to be in the same boat.

Very shortly after our return, the number one question from investors became ‘what is going on with the demerger from Westpac Banking Corporation?’ It made for a few tricky conversations, particularly with rating agencies circling. But once we got that out of the way, we received the usual questions other panel members have discussed.

Environmental, social, and governance (ESG) is also a focus. It is at the forefront of investor consideration and we are thinking about it very hard. Every decision we make from a business point of view has an ESG lens to it now, and this is driven in part by a shift in investor feedback. It seems like every week I get an email from an investor with a question on our ESG initiatives.

LUCAS Volatility has re-emerged. We had Evergrande back in late September 2021, rate volatility in October 2021 and inflation emerging as a risk for markets as well. There is the ongoing COVID-19 situation with outbreaks emerging in Europe and new strains coming along from time to time. It is going to be interesting to navigate over the next 12 months.

There is still good value in funding markets, in spreads on a relative value basis. Investors will command higher new-issue premia because of volatility increasing interest rates and credit spreads over time.

BRADLEY One of the emerging risks we are going to face is our parent companies’ funding requirements. They must refinance the committed liquidity facility and the term funding facility, which is about A$140 billion (US$99.7 billion), and refinance their term funding at the same time.

Markets will be crowded, like they were in 2014 – New Zealand banks will have to be nimbler. When Australian banks are appearing in the market at very regular intervals with benchmark trades, investors will sit on their side of the spread – they are not going to cross it. So new issue premia will probably go up and we will be issuing closer to initial price talk.

We are going to have to be nimble in the 2022 and 2023 financial years – funding when we can and not being too choosy when we go. When the jumbo jets are lining up on the runway, you do not want to be behind them in a small plane – you will be blown away.

This is potentially what New Zealand banks are facing. We went through it in 2014 – every week there was an Australian bank in the market – and I suspect we are going to have the same going forward.

TURNER I echo these sentiments – it is something we are acutely aware of. The sudden shift in Australia made it a more challenging outlook for the competition for funding.

The good news is that markets remain relatively constructive. Despite near-term volatility, credit spreads are relatively low on a historical basis and there seems to be good demand.

The last few trades New Zealand banks have executed offshore have all been well received. So it is not all bad – but I think the jumbo jets lining up is something that keeps me awake at night and this is good advice from Neil Bradley on how to approach it.

DELL On the conditions of funding markets, I will touch lightly on the deposit side. We have seen some interesting dynamics here as rates headed to historical lows. Reflecting back to August 2019, when we saw the OCR cut to 1 per cent, we started to see term deposits go into decline and a big shift toward core deposits as customers valued liquidity despite lower returns.

One dynamic we are watching for, as rates go higher, is what is the turning point on the way back up. I do not know if it will occur at the same pace that it happened in the other direction, but it is certainly a key watch point as we move into a higher rate environment.