The Hamilton-based lender is watching multiple indicators as the lending environment sails close to the wind – but is well positioned to handle the likelihood of slower growth in 2023
This article was produced in partnership with Basecorp Finance
Bennett Richardson of New Zealand Adviser asked John Moody, Chief Financial Officer at Basecorp, about how the non-bank plans to help advisers and their customers weather the changing economy and a continuing trajectory for tighter monetary conditions.
There are a lot of moving parts in the lending environment for Basecorp Finance right now, but the Hamilton-based non-bank is more than ready.
Chief Financial Officer John Moody has a wary eye on interest rates and is on the lookout for any signs of stress among borrowers – but emphasises that the name of the game is consistency and a long-term focus.
“Expect to see more of the same from us in 2023 in what is very likely to be a slower growth environment,” he says.
“[It] will inevitably require a greater degree of caution, and an empathetic approach to those borrowers who need help as the rising interest environment causes difficulties.”
In an odd way, the trauma of the COVID years has toughened up both Basecorp and customers to a degree. Moody sees the market as more resilient now than it might have been.
“We have a good blueprint and tools from the COVID lockdown era to assist borrowers who need support.”
There are currently few signs of mortgage stress among its borrowers, with Basecorp maintaining historical 60+ day arrears at less than 1%.
Data from credit bureau Centrix likewise shows home loan arrears tracking around 1% over the last 12 months – some of the lowest levels on record and well below the average 1.4% proportion of home loans with missed payments typical of the years before the pandemic.
The situation for Basecorp is a glimpse into the future of sorts for whether borrowers can handle higher rates because as a floating rate lender it has seen higher OCR rates passed on to borrowers far more quickly than the case for fixed rate lending where there is a time lag.
“To date, borrowers have been managing these higher payments.”
The many who locked in rates for longer terms at historic lows during the pandemic still have breathing space, but the current rate hike trajectory and broader inflationary challenges are concerning.
Moody says that Basecorp will be “no exception” if repayments start to falter. For the moment, borrowers are prioritising their mortgages while improving wages and a war chest of savings built up during 2020 and 2021 provide a cushion.
It will be those homebuyers who have not had time to build a savings buffer and were stress tested at levels close to current interest rates as part of the lenders’ approval process that might hit trouble.
But Basecorp’s approach to rising interest rates for its customers is different to some other lenders.
The non-bank accepted a level of initial net interest margin compression by not previously passing on the full level of underlying cost increases in its pricing, although it also acknowledges there remain significant additional OCR rises yet to come that will translate into higher interest rates for its borrowers.
“Our current rates absorbed the initial few OCR increases and are now risk priced from 7.95% - about 0.60% outside major bank floating rates, and we think a competitive proposition in this environment,” says Moody.
And with a fresh round of $300m in funding secured in May, the firm is not short of cash to lend.
“[This] has left the business both well capitalised and with good available capacity to fund new loans and continue to make consistent credit decisions into 2023.”
More negatively, credit margins and funding appetite have deteriorated in the wholesale market since May, and this is likely to lead to slower growth in the overall non-bank sector.
But this is being offset for Basecorp through its increasing business from the adviser channel.
“We’re gradually expanding the number of advisers we deal with consistently, while also maintaining turnaround times of 24-48 hours to our existing network.”
The adviser channel is moving from strength to strength and Moody has heard anecdotally that 55-60% of new residential loan market business in New Zealand now comes via advisers, up from the last official figure of 40% given in 2017 by the Professional Advisers Association before the specialist body’s members joined Financial Advice New Zealand (FANZ) in 2018.
“There’s significant difficulties in obtaining finance currently, the complexity of information requirements and underwriting has increased markedly with the CCCFA (Credit Contracts and Consumer Finance Act), and customers are looking to the channel for assistance in navigating these challenges,” he says.
Basecorp and other non-banks are major beneficiaries of a larger adviser channel as mainstream banks continue to pare back their branch networks and tighten lending policies.
“[We] remain very focused on continuing to be a long-term consistent and reliable partner for the sector when bank funding is unavailable.”
Basecorp Finance is a non-bank mortgage lender, operating since 1997 and headquartered in Hamilton, New Zealand. Basecorp has a loan book of more than NZ$1bn and is one of the leading nonbanks owned and operating in New Zealand. Its core product offering is primarily long-term (and some short-term) first ranking residential mortgages to consumer and non-consumer clients. It aims to finance ‘everyday Kiwis into residential housing’ and has a highly experienced team of 15 with a proven track record in managing credit risk through many economic cycles. Basecorp originates over 90% of loans through adviser channels.