Competition on loan pricing between New Zealand’s retail banks should be at extremely high levels right now, according to Reserve Bank Governor Adrian Orr.
He told Parliament’s Finance and Expenditure Committee on Thursday that it would be an interesting time to observe how retail banks were pricing their loans and deposits.
Mortgage rates are set relative to banks’ funding costs, which are anchored by the Official Cash Rate for short terms and driven by deposit rates and offshore funding costs longer term.
Orr said some retail banks had been able to cut their mortgage rates ahead of Wednesday’s monetary policy decision due to falling international borrowing costs.
Many market participants are attempting to predict when the US Federal Reserve will begin cutting interest rates, which is driving down wholesale rates available to NZ banks.
“I would like to think that competition, right now, should be extreme at the pricing level, because the volumes of business going through the banks are very low,” he said.
This means banks are under pressure to offer the few available clients the best possible rates on one hand, while also facing fewer cheaper funding options.
Global interest rates remain high, the Reserve Bank has the OCR on hold, and depositors are also demanding strong returns. This means competition is “heating up”, Orr said.
“We would like to think that margins will better normalize rather than be at quite historically high levels across the banking system”.
Committee probe
The Finance and Expenditure Committee, chaired by National MP Stuart Smith, will soon begin an inquiry into banking competition, customer service, and profitability.
It will likely begin after the Commerce Commission reports back with its draft market study late next month.
Commerce Minister Andrew Bayly told Interest.co.nz that it could also focus on how to encourage banks to lend into more productive parts of the economy than housing.
The Commerce Commission’s market study on personal banking services was launched by the Labour Government prior to the election last year in response to concerns surrounding banks’ record profits.
Since then, things have gone less swimmingly for some banks. Vittoria Short, chief executive of ASB, told Interest.co.nz they had written some loans at zero margin in the past year.
The bank saw its interim profit fall from last year's record $840 million to $749 million in the six months ended December.
ANZ also reported a decline in annual profit but BNZ and Kiwibank both increased their profits and net interest margins.
The Reserve Bank’s own data shows banks’ profit after tax has been declining during 2023 but remains higher than pre-Covid levels.
19 Comments
Many market participants are attempting to predict when the US Federal Reserve will begin cutting interest rates, which is driving down wholesale rates available to NZ banks.
My money is that the Fed may start cutting rates as early as next month. The Bank Term Funding Program (BTFP) will not be renewed from March 12. Remember the regional banks are largely insolvent and the CRE issue is not going away.
Arthur Hayes thinks the cessation of the BTFP will cause a mini-financial crisis and force the Fed and Treasury to cut rates, taper QT, and/or resume of money printing via QE.
Sorry Adrian, net interest margins are at record highs, and bank profits after tax are running at around $7bn per year. Mind you bank profits basically tick along at around 1.2% of total loans outstanding. So, if you want to reduce bank profits, bring back the mighty State Mortgage.
Why on earth would banks compete on price in nz. That would erode all their obscenely high margins just to win one of the few existing mortgage customers who might actually change. There aren't many new customer to try to win.
No..those big bank boys can just sit back and enjoy the money and laugh about how easy it all is.
Orr said some retail banks had been able to cut their mortgage rates due to falling international borrowing costs.
What are the dynamics here? Banks make some money over some interest rate swaps and that's able to offset for lowering borrowing cost?
Banks can't buy NZD from overseas....
re ... "I would like to think that competition, right now, should be extreme at the pricing level, because the volumes of business going through the banks are very low,” he [Orr] said.
Does he not understand how oligopolies work?
I'll probably get banned for this but this is a statement from a rich prick on a guaranteed salary of $700k.
Adrian - this is NOT a game. And you and the MPC are part of the problem.
They failed in every way through COVID times, Orr got a huge pay rise and now he’s trying to save face and finally achieve something in the RBNZs remit, sadly it will come at the cost of people homes, jobs and lifestyles from the foolish decisions that the RBNZ made. Explaining this to friends and family that the RBNZ are to a large degree the manufacturers of the current issues, and supposedly the solution, you can see when the penny drops.
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