Demand for credit declining, lending standards expected to tighten - bank survey

Demand for credit declining, lending standards expected to tighten - bank survey

Demand for credit is declining and Kiwis can expect borrowing to get tougher, a new survey shows.

An out-of-cycle Credit Conditions survey conducted by The Reserve Bank in June looks at how credit conditions have changed following COVID-19 lockdown. It combines responses from 12 New Zealand banks and includes expectations of credit demand and availability for the rest of 2020.

During the first six months of the year, demand for credit fell, including for mortgages, capital expenditure and mergers and acquisitions.  

Bank lending standards have tightened, including their assessment of variable income for mortgage borrowers and lending to businesses directly impacted by COVID-19.  

In the second half of the year, banks expect demand to reduce and say lending standards are likely to tighten.

Household lending 

While mortgage lending declined over the first half of the year, several banks reported an increase in enquiries in May.  

Mortgage lending standards were "broadly unchanged". But with unemployment expected to rise, borrowers could expect income and servicing checks to be more stringent.  

"Banks therefore expect to perform more thorough due diligence to assess income and job security, with higher haircuts applied to variable or 'at risk' income (for example, bonus, commission, boarder/flatmate rent, Airbnb income) included in servicing assessments," the survey said.

In the second half of the year, banks expect demand for consumer (including mortgage) lending to fall amidst rising unemployment and the economic impacts of COVID-19.

Based on a 'diffusion index' representing an average response across banks, expectations of credit availability showed a reduction of -15.8 in March and -0.9 in June. 

Business lending

COVID-19 lockdown saw an increase in small-to-medium sized (SME) businesses applying for relief, such as suspension of repayments, changes to interest-only and changes or waivers to loan conditions.  

Demand for credit for capital expenditure dropped in the first half of the year. Due to falling business confidence, this trend is expected to continue in the second half of 2020.

Banks reported a "modest tightening" of credit availability to SMEs and expect to apply tighter standards to businesses operating in the tourism, retail, accommodation and construction sectors.

For corporate businesses (annual turnover over $50m), the first half of 2020 saw high demand for standby liquidity facilities. Demand for credit for capital expenditure and mergers and acquisitions reduced.  

Requests for covenant relief increased. Banks said these were approved where the business had a strong pre-COVID balance sheet.

Banks expect these trends to continue over the next six months.  Rather than change their corporate lending standards, banks said they were taking a "specific sector approach". Greater focus would be placed on "high risk" sectors exposed to discretionary spending, for example retail, tourism and accommodation.

Commercial property lending

Borrowing on commercial properties slowed during the first half of the year. Banks forecast a large slowdown ahead, particularly for development lending.

"Banks reported that uncertainty surrounding the depth and duration of the downturn has affected market confidence and slowed pre-sales in residential development projects, although demand is reportedly strong in the Auckland market," the report said.

Due to the COVID-19 environment, banks were more cautious and had "reduced their appetite" for new development and investment lending.

Agricultural lending

Drought conditions and processing delays due to supply chain disruptions caused demand for working capital to increase in the first half of the year.

Demand for credit in the horticulture industry was strong, particularly from the kiwifruit industry.  

Agricultural businesses were reviewing their capital investment and remained cautious about taking on new borrowing.  

Economic uncertainty is expected to limit demand for agricultural loans in the second half of the year.