We look at some key data available from the RBNZ Dashboard to help investors and depositors in our banks understand where some important hazards lie

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According to RBNZ data (S40), Kiwi households store $175.3 bln of their cash resources in banks. That is held in savings and other at-call demand deposits which pay minimal interest, in chequing/transaction accounts which typically pay zero interest, and in term deposits, which these days pay a low interest return.

These household deposits, when combined with similar deposits of businesses, make up about two thirds of the funding of our retail banks. The balance is supplied by other wholesale lenders who provide a quarter of the funding, and by shareholders who have the least skin in the game, supplying only 8% of the funding required. To them, however, go all the profits of banking – and in the year to September 2018, those amounted to $5.5 bln, after tax. To most independent observers, it seems a wildly unbalanced funding structure, built on leverage.

But it is what it is, and while the RBNZ is making moves require shareholders to invest properly in their enterprise, it would be wise for investors and savers who hold some of their liquid wealth in banks to understand how they are exposed by this unbalanced relationship.

The RBNZ Dashboard allows us to drill into the key data, by bank. Here is the top level data as at September 2018:

 Net loansAll otherTotal assets CustomerDebtAll otherShareholder
September 2018& advancesAssetsassets depositssecuritiesliabilitiesinvestment
 $bln$bln$bln $bln$bln$bln$bln
ANZ126.532.5159.0 104.126.615.313.1
ASB83.812.095.8 61.523.23.18.0
BNZ83.216.8100.0 61.325.45.97.4
 ——–——–——– ——–——–——–——–
Main banks392.672.9465.6 305.
Cooperative Bank2.40.32.7
Heartland Bank4.10.54.6
SBS Bank3.80.74.6
 ——–——–——– ——–——–——–——–
Challenger banks26.24.931.2
 ================== ========================
All retail banks418.977.8$496.7 324.895.735.740.6

The four Australian banks supply 89% of the loans and advances to New Zealand borrowers, and hold 89% of customer deposits. They supply 89% of the shareholder investment in our retail banking system. They dominate by any definition. The RBNZ has a number of requirements to ensure that Australian domination doesn’t result in any problems that their parents may encounter by infecting New Zealand. But whatever they require, it will probably be inadequate in a major Australian banking crisis. And there is always suspicion that the actions of both the bank head office policies, and even Australian regulator requirements, both work against RBNZ objectives to some degree.

So, investors in bank offers and depositors in bank accounts should use this information to ensure they deal with these banks knowing their financial strengths, or otherwise.

The same data, but presented as a percent of total bank assets is a starting point:

 Net loansAll otherTotal assets CustomerDebtAll otherShareholder
September 2018& advancesAssetsassets depositssecuritiesliabilitiesinvestment
 %%% %%%%
ANZ79.5%20.5%100% 65.4%16.7%9.6%8.2%
ASB87.5%12.5%100% 64.2%24.2%3.3%8.3%
BNZ83.2%16.8%100% 61.3%25.4%5.9%7.4%
Kiwibank90.0%10.0%100% 78.5%11.4%2.9%7.2%
Westpac89.4%10.6%100% 68.9%19.6%3.4%8.1%
 ——–——–——– ——–——–——–——–
Main banks84.3%15.7%100% 65.6%20.4%6.0%8.0%
Cooperative Bank88.7%11.3%100% 83.5%1.7%7.9%6.9%
Heartland Bank88.9%11.1%100% 64.8%4.2%17.1%13.9%
Rabobank88.0%12.0%100% 35.5%0.0%51.3%13.2%
SBS Bank84.1%15.9%100% 73.8%6.3%13.0%6.9%
TSB73.8%26.2%100% 90.4%0.5%0.6%8.5%
 ——–——–——– ——–——–——–——–
Challenger banks84.2%15.8%100% 62.9%1.8%24.6%10.7%
 ================== ========================
All retail banks84.3%15.7%100% 65.4%19.3%7.2%8.2%

Some items stand out when looked at this way. First is the high level of “other assets” at ANZ, which relates to high levels of derivatives funding. You can inspect more about this by reviewing the R5 and R6 elements in the RBNZ Dashboard (and it should be noted they are largely offset by R11 and R12. In stress however, you might be sceptical about the ‘asset’ value because certainly the ‘liability’ value will always hold). TSB’s large “Other asset” position is quite different, a $1.8 bln investment in Government, local authority, SOE and other corporate bonds, fairly evenly distributed. (Note 6.)

ASB and BNZ have relatively large exposures to wholesale funding.

Another item worth noting is the relatively low level of shareholder support by some New Zealand-owned banks (especially Kiwibank) – and the relatively higher level by others.

Of course, in any financial business, the real value and the real exposure is in their dominating loan books. Most of the rest is mere detail.

And here things get interesting. Almost 59% of all lending is for housing, and all but three banks have 60% plus of their loans in the residential housing market. Only BNZ among the main banks can’t be called a mortgage bank. Rabobank (rural) and Heartland Bank (asset funding) aren’t either.

September 2018 Housing loans of all
 Risk weighted
housing loans 
net risk
 $ bln%$ bln%
Main banks235.660.0%69.729.6%
Cooperative Bank2.292.4%0.837.0%
Heartland Bank0.512.3%0.6124.6%
SBS Bank3.078.0%1.137.8%
Challenger banks10.339.4%4.341.8%
All retail banks245.958.7%74.030.1%

The overall system exposure to housing risks is clear in this data. Also clear is that that most banks regard that risk as low. BIS and RBNZ rules allow the main banks to assign risk weightings to their loan portfolio based on their own definitions and, surprise, they judge their own portfolios as low-risk. And this self-judgment allows them to hold less capital against these housing loans. In the ten years plus that this risk-weighting system has been in place, the main banks have taken a generic 50% risk weighting under previous rules to down as low as just 22.4% risk weighting (ANZ). To their chagrin, the smaller banks are not permitted to use this self-assessment process and need to hold higher levels of capital. It is a situation that the RBNZ has finally realised is flawed and is moving to rectify. But weaning banks off low risk-weights for housing won’t be easy and they will resist staunchly.

If you are depositor however, you may wish to know who has gamed the risk-weighting system the most.

And you may also wish to know where the current non-performing housing loans are.

September 2018 Top 5 credit exposures
to non-bank counterparties
/ CET1 
 non performing
housing loans 
non performing
Housing loan
 %$ mln%%
All main banks 385.495.5%95.8%
Cooperative Bank9.7%4.01.0%0.9%
Heartland Bank23.8%0.20.0%0.2%
SBS Bank43.3%6.41.6%1.2%
Challenger banks 18.24.5%4.2%
All retail banks $403.6100%100%

The main banks have 95%+ of the mortgage market but there is a wide dispersion in where the non-performing loans reside. (See RBNZ’s G5 definition. This is the total of both impaired loans, plus loans 90 days past due “not not [yet] impaired”.) Maybe some banks are stricter with the definitions than others, but the wide dispersion may raise eyebrows. And to be fair, the numbers and values are not large – in the table above they are in $ millions, not $ billions as in the first tables.

The second column in the previous table does not relate to housing loans at all. Rather is records how much of a bank’s common equity tier one capital is exposed to their five largest borrowers. Away from housing loans, a few large corporate loan wipeouts (more than just ‘failures’) could quickly put their capital at risk and push them below their regulatory minimums. This is detail any depositor should be aware of. (see RBNZ Dashboard item V1. For those fascinated by interbank relationship conspiracies, V3 may also catch your attention. Personally, I am not one of them.)

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