Bank of New Zealand expects business lending growth to slow by more than half next year as loan demand has already slowed even as the NZ economy emerges out of recession. "We are forecasting a growth of three to four per cent in 2010," BNZ's managing director Andrew Thorburn said in an interview. Business lending includes loans to the agriculture and the dairy farming sector. Business or non-housing lending increased by 8.9 per cent during the full year, compared to the year before but rose only 2.9 per cent from March 2009 levels, indicating the slowing trend. Interestingly, BNZ has noted a softening of asset quality in the property and agricultural sectors due to the recession. At the same time, Thorburn said the increase in bad and doubtful debt was to be expected because of a number of years of low provisions. He doesn't expect the trend to continue. Bad and doubtful debt charges rose to NZ$185 million during the full year, up 176 per cent from NZ$67 million the previous year. BDD charges in the second half stood at $89 million, down from $96 million in the first half of 2009. The outlook for business lending contradicts expectations of growth in the NZ economy, as the economy is believed to have emerged out of recession. But Thorburn believes it is not so, as the economy is only just moving out of negative growth to "in-trend" growth and demand drivers are still not still visible. For Thorburn, seeing the emergence of demand will be an experience in itself, having taken over the helm of BNZ at a very challenging time last year. "New Zealand is a smaller market (compared with Australia), but very dynamic," and also very competitive and subject to more volatility, he says. "And the economy doesn't have the same factors." Separately, as interest rate expectations change, BNZ is confident its home loan borrowers will make a move back to fixed-rate loans. Unlike in Australia, the majority of mortgages are on a fixed-rate basis in NZ with BNZ's fixed-rate mortgages comprising more than 85 per cent of its mortgage portfolio. This has gone down to around 75 per cent as borrowers have moved to floating rates following the steep drops in interest rates last year. The bank expects that to lift back the 85 per cent level.While increase in fixed-rate mortgage portfolio is expected to have a favourable impact on the bank's net interest margins considering fixed rates for longer durations are significantly higher than floating rates, the net impact will be interesting to watch as customers also increasingly start favouring time deposits over on-demand. Retail deposits of the bank increased by 6.4 per cent in the 2009 full year, but rose only 4.6 per cent from March 2009 levels with faster growth seen in on-demand deposits compared with term deposits. "The rate of growth in term deposits has slowed due to intense competition for deposits in New Zealand as wholesale funding costs remain high."