BEHIND THE NUMBERS: Kiwi economy outperforming expectations

Two weeks ago, I was one of 50,000 people packing Auckland’s Eden Park for a concert by popular local band Six60. For much of the world, still struggling to contain COVID-19 infections, this would have been a confronting sight.

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The event – said to be the biggest concert in the world since COVID-19 began - highlighted how quickly life in New Zealand has regained a sense of normality after a series of lockdowns and restrictions.

"We’ve seen first-hand the resilience of sectors such as housing, construction and agriculture during the crisis.”

The New Zealand economy too has been quick to regain its footing and by most measures has comprehensively outperformed the expectations of a year ago.

That unexpectedly strong recovery has underpinned ANZ New Zealand’s half-year result. Meanwhile, because the worst case scenarios didn’t eventuate, ANZ NZ has been able to release around 25 per cent of the additional credit provisions we had put in place since the start of the pandemic.

We today reported a statutory net profit after tax of $NZ930 million for the six months to 31 March 2021.

Cash net profit after tax was $NZ962 million, up 42 per cent on the corresponding half in the 2020 financial year, reflecting a strong home lending market and the significant reduction in credit impairment charges.

Expenses decreased 8 per cent due to lower personnel costs, a series of simplification initiatives, and the divestment of UDC Finance in September 2020. Both customer deposits and gross lending were up, 1.6 per cent and 3.5 per cent respectively, from 30 September 2020.

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Overall resilience

While the long-term impact of COVID-19 on the New Zealand economy is still playing out, we’ve seen first-hand the resilience of sectors such as housing, construction and agriculture during the crisis.

Construction and agriculture customer risk profiles remained steady over the last 12 months while strong commodity prices and fiscal stimulus are providing support for both sectors. 

In construction, there is very little impairment, delinquency levels are low and non-performing loans have been further reduced. In agriculture, delinquency levels have been flat and non-performing loans have decreased. Weighted average probability of default has remained steady in both sectors.

While we have provided approximately $NZ2.5 billion of new lending to businesses over the past six months, our overall business lending has reduced because of a number of factors, ranging from customers choosing to repay some of their debt due to lower interest rates and better-than-expected commodity prices, the repayment of some significant property development loans as those developments completed, and some of our larger customers taking advantage of favourable debt capital markets.

The dynamics of each sector are different but underpinning this recovery has been a sound crisis response by the Government coupled with New Zealand’s natural assets such as isolation and a small population.

Sustainable, accessible housing

The headline act for many months has been the housing market with prices up 21 per cent in a year due to historically low interest rates, reduced loan-to-valuation ratio requirements and supply constraints.

Housing induced domestic demand has been the engine for economic growth since the country’s main lockdown in early 2020. Reserve bank data show the mortgage market grew 6.4 per cent in the six months to March 2021.

As NZ’s largest bank we can see that play out in our result with home lending increasing $NZ5.8 billion, or 6.8 per cent, over the six months to 31 March, taking ANZ NZ’s market share to 30.6 per cent, up 12 basis points in that period.

In December, ANZ NZ was the first bank to require a 40 per cent deposit from residential property investors as a step to bringing balance to the housing market. We believe it’s in everyone’s interests for residential property prices to be sustainable long term and for home ownership to be accessible to as many people as possible.

The Government’s housing policy announcements in late March are expected to take some of the heat out of the housing market, especially the removal of interest deductibility.

But we’re not expecting house prices to fall. Housing is still an attractive option when returns elsewhere are poor and there’s still a supply shortage which needs to be resolved. The pipeline of residential construction is strong but capacity constraints are biting, which will slow the pace of delivery.

Residual impact

While our interim results reflect that expectations of how the pandemic would impact on the economy have largely not come to pass, a full recovery is still some way off. Economic confidence will take time to be restored as residual impacts of the pandemic play out.

The trans-Tasman bubble is welcome news for many but it’s not yet clear how much it will impact on growth.

Fiscal and monetary policy have clearly done their jobs. Now debate is turning to whether they may have over-achieved, given both policies work by increasing debt – that is, bringing forward spending from the future.

For now, business and consumer sentiment are fairly robust and there’s light at the end of the tunnel with the vaccination rollout underway. However a dip in business confidence and growing cost pressures in early April show stresses and strains still exist.

While there’s room for optimism, we also know the impact on the economy is uneven. Sectors that relied on overseas visitors, such as education, hospitality and tourism, have been disproportionately affected and we’ve seen the challenges facing our customers in those industries.

Agriculture - which contributes around 70 per cent of New Zealand’s total merchandise exports – has seen mixed fortunes during COVID-19 but all agri sectors have been negatively impacted by disruptions to global shipping and shortages of refrigerated containers.

During the COVID-19 crisis ANZ worked closely with the Government to help customers get through. The company implemented key Government-led initiatives, such as home loan deferrals and the Business Finance Guarantee Scheme, as well as a major program of reduced fees, charges and interest rates.

The Reserve Bank of New Zealand’s use of its policy tools, including large scale asset purchases and the funding for lending program, have kept interest rates lower and supported access to credit for borrowers.

This was a very solid result – particularly given what we feared 12 months ago. We see opportunity for growth. But we also remain cautious.

Antonia Watson is Group Executive and CEO New Zealand at ANZ

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