RBNZ released results of the most recent Credit Conditions Survey, which was conducted out-of-cycle at the end of June to understand how domestic credit conditions have changed post-lockdown. The results show that banks experienced an increase in demand for loans for working capital from small and medium enterprises (SMEs) and corporates to meet fixed expenses. However, the demand for credit for capital expenditure has fallen. Banks reported that they have tightened several lending standards, particularly around serviceability requirements and interest rate margins across more risky sectors. Banks are now closely scrutinizing new lending to sectors directly exposed to the COVID-19 shock and further tightening of lending standards is likely.
The following are the key highlights of the Credit Conditions Survey in the context of COVID-19 shock:
- Banks reported a decline in demand for mortgage lending over the first half of 2020 while the mortgage lending standards remained broadly unchanged. Most banks did not report a change in appetite for high-LVR (or loan-to-value ratio) lending despite the temporary removal of restrictions. One bank did note that high-LVR applicants would likely require very strong servicing positions and that property type and location would need to be less susceptible to price declines.
- Banks reported an increase in SME applications for relief in response to the COVID-induced lockdown along with a modest tightening of credit availability in the SME sector. Banks reported support largely came in the form of suspension of repayments or moves to "interest only" terms, modifications (or waivers) of loan covenants, and temporary liquidity lines for working capital to meet fixed costs. Banks expect this to continue over the second half of 2020. Demand for credit for capital expenditure fell in the first half of the year and banks expect demand to remain muted for the remainder of the year, reflecting deteriorating business confidence.Banks expect many businesses will resize to match the new level of demand, but some SMEs will fail, thus dampening demand for credit.
- Banks reported high demand for standby liquidity facilities over the first half of 2020, along with a reduced demand for credit for capital expenditure and mergers and acquisitions. Generally, banks expect these trends to continue over the next six months, although some banks expect transactions that were put on hold due to COVID-19 may begin to progress again. Banks also reported a significant increase in requests for covenant relief. Banks noted they approved these requests if the corporate customer had a strong pre-COVID balance sheet.
- Banks reported a decrease in demand for commercial property lending during the first half of the year and forecast a significant slowdown over the latter half, particularly for development lending. Banks noted that the greatest uncertainty concerned the impact of COVID-19 on commercial property values. One bank reported that commercial property valuations are difficult to obtain, as valuers are preferring to wait until market evidence exists post COVID-19. Several banks noted that more current valuations will be required and that valuation cycles would be increased.
The usually biannual Credit Conditions Survey asks banks qualitative questions about changes in credit conditions in bank lending markets. Banks provide separate responses for household, small and medium enterprise, corporate, commercial property, and agricultural lending. The questions focus on observed changes in loan demand and credit availability over the previous six months and expected changes over the next six months. The survey also collects information on how how the lending standards of banks have changed over the past six months. The next quarterly survey will be conducted as usual in September and the results will be released in October 2020.
Keywords: Asia Pacific, New Zealand, Banking, COVID-19, Credit Conditions Survey, Mortgage Lending, SME, Credit Risk, Payment Deferrals, RBNZ
Leading economist; commercial real estate; performance forecasting, econometric infrastructure; data modeling; credit risk modeling; portfolio assessment; custom commercial real estate analysis; thought leader.
Previous ArticleNBB Updates Law on Status and Supervision of Credit Institutions
In a letter addressed to the industry, the Australian Prudential Regulation Authority (APRA) set out an updated schedule of policy priorities for the banking, insurance, and superannuation industries.
The European Commission (EC) adopted a comprehensive review package of Solvency II rules in the European Union.
The Office of the Comptroller of the Currency (OCC) issued Versions 1.0 of the "Earnings" and "Regulatory Reporting" booklets of the Comptroller's Handbook.
The European Central Bank (ECB) published results of its economy-wide climate stress test, which aimed to assess the resilience of non-financial corporates and euro area banks to climate risks.
The European Banking Authority (EBA) published a report on the use of digital platforms in the banking and payments sector in European Union.
The Hong Kong Monetary Authority (HKMA) published updates on the policy measures that were announced in context of the ongoing pandemic.
The International Swaps and Derivatives Association (ISDA), along with several other associations, submitted a joint response to the Basel Committee on Banking Supervision (BCBS) consultation on preliminary proposals for the prudential treatment of cryptoasset exposures.
BIS published the September issue of the Quarterly Review, which contains special features that analyze the rapid rise in equity funding for financial technology firms, the effectiveness of policy measures in response to pandemic, and the evolution of international banking.
The Basel Committee for Banking Supervision (BCBS) met in September 2021 and reviewed climate-related financial risks, discussed impact of digitalization, and welcomed efforts by the International Financial Reporting Standards (IFRS) Foundation to develop a common set of sustainability reporting standards
The Office of the Comptroller of the Currency (OCC) issued a Cease and Desist Order against MUFG Union Bank for deficiencies in technology and operational risk governance.