CFOs continue to be optimistic but remain risk-averse

New Zealand chief financial officers continue to be optimistic but remain risk-averse

Lingering international economic issues contribute to higher levels of CFO uncertainty

Despite New Zealand chief financial officers (CFOs) continuing to feel optimistic about their companies’ prospects, the majority of CFOs report their organisations as risk-averse compared to the broader market and others in their industry. This is according to Deloitte’s third annual New Zealand CFO survey released today.

In the first half of March, Deloitte surveyed close to 133 CFOs from a range of locations, industries and business sizes. The survey results provide the CFOs’ perspective on their own businesses, the current state of the economy and where they see risks and opportunities.

Forty-six percent (compared to 58% in 2014 and 37% in 2013) of CFOs surveyed reported they were either somewhat more optimistic or significantly more optimistic about their company’s financial prospects compared to three months prior.

Deloitte audit partner, Peter Gulliver says that the continued high levels of optimism are being driven by a stronger New Zealand economy, low inflation, a recovering US economy and continued low interest rates.

“However, the optimism is tinged with some realism. Headwinds caused by lingering issues around European debt, slowing economic growth in China and falling commodity prices are behind a slight increase in the levels of CFO uncertainty over last year,” says Mr Gulliver.

A net 45% of respondents reported higher than normal levels of external financial and economic uncertainty. While this is lower than the net 64% reported in 2013, uncertainty has made somewhat of a comeback in 2015 from the net 36% reported last year.

Despite CFO optimism levels remaining historically high and uncertainty levels still relatively low, once again just over half (52%) of CFOs surveyed believe that the time is right for taking greater risk onto their balance sheets. This “risk divide” emerged as a theme in last year’s survey and continues in 2015.

“When we look more deeply into CFOs’ attitudes toward risk we find they remain cautious, which could be a drag on potential economic growth,” says Mr Gulliver.

Risk aversion remains a dominant theme with 56% of CFOs reporting their organisations to be risk-averse compared to the broader market and others in their industry – this despite the fact that risk takers continue to reap the benefits through higher revenue growth.

“This cautious approach is perhaps driven by the rebound in uncertainty around external conditions and the continued spectre of disruptive change. But it also may be linked to a disconnect between board and management attitudes toward risk,” he says.

According to CFOs surveyed, the board does not set the risk appetite in 41% of businesses. And in 22% of organisations, CFOs report that the board and management views are more than “a little divergent” when it comes to risk.

“The results suggest a need to achieve greater alignment between board and executives’ attitudes on risk. A considered, aligned and healthy appetite for risk can be a strong driver of an organisation’s growth strategy,” says Mr Gulliver.

Other highlights from the New Zealand CFO survey include:

• CFOs continue to take a passive approach to growth indicating they favour organic expansion, followed by increasing product and market reach. Capital restructuring, M&A and capital expansion are a lower priority.

• Forty-one percent of CFOs expect the Official Cash Rate (OCR) to remain at 3.5%, while 44% predict it may fall to 3.25% or lower.

• Nearly three-quarters (73%) of respondents predict the value of the NZD to sit at less than $0.80 USD in 12 months’ time. This is in sharp contrast to 2014 when 93% predicted the dollar would appreciate to $0.85 USD or higher. This reflects an improving US economy.

• A net 59% (up from net 44% in 2014) of CFOs think that New Zealand corporate balance sheets are optimally geared and, unsurprisingly, a net 41% (the same as 2014) report no plans to change their levels of gearing in the coming year.

“Last year we challenged CFOs to make the most of these better economic times to make inroads into improving growth and productivity. In 2015, this challenge remains very much open,” concludes Mr Gulliver.

To read or download the full New Zealand CFO survey, go to http://www2.deloitte.com/nz/CFOSurvey.

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