Opinion: NZ banks may follow their Australian parents and hike floating mortgage rates before any official move, but will struggle to justify it. Your view?

By Bernard Hickey

ANZ and Westpac announced increases in their floating mortgage rates in Australia on Friday, even though there had been no change in the Official Cash Rate.

They argued the cost of their foreign borrowings had increased substantially and they needed to pass this cost on to customers.

The move triggered sharp criticism from the Australian government and is expected to be followed by similar rate reviews in Australia by Commonwealth Bank of Australia (CBA) and National Australia Bank (NAB), who own ASB and BNZ respectively here.

So will the New Zealand arms of these same Australian banks do the same here for the 60% of borrowers who are now on floating mortgage rates? And if they do, can it be justified?

It's worthwhile looking first at what has happened in Australia. The move late on Friday by ANZ to increase its floating mortgage rate by 6 basis points to 7.36% came as a surprise because many borrowers had been hoping the Reserve Bank of Australia would cut its official rate and that banks would pass on most, if not all of those cuts. Instead, the Reserve Bank held its official rate at 4.25% and now two of the big four have actually increased their rates.

This has been brewing for some time in Australia. ANZ announced in December it would start reviewing its floating mortgage rates independently of any moves in the official rate in Australia, signalling it saw floating mortgage rates as disconnected from the official rate because of a rise in foreign borrowing costs. Gareth Vaughan reported in mid January that other Australian banks were expected to do the same.

But the decision on Friday to hike without any 'cover' from the Reserve Bank was still a surprise. Westpac's decision within hours to lift its floating mortgage rate by 10 basis points to 7.46% deepened the shock.

Australian Treasurer Wayne Swan attacked the decision and encouraged bank customers to change banks. Here's what he was reported as saying in the Sydney Morning Herald, which led with the story through the weekend and again this morning:

'‘I think ANZ customers will be absolutely ropable with the ANZ,’’ Mr Swan said this afternoon. ‘‘The fact is that the major banks in this country are very profitable. Their net interest margins are back to where they were prior to the global financial crisis.

‘‘And what I say to Australians who are observing these decisions, this one from the ANZ, is you do have the capacity to walk down the road and get a better deal.’’

Prime Minister Julia Gillard chimed in with a similar call for customers to change banks, although News.com.au noted that Gillard herself had not changed the mortgages on her home and investment property from Westpac. Other Australian ministers are also apparently stable customers of ANZ.

The Australian banks have form on this. All of the big four have at various times in the last three years either not passed on all of any cuts in the official cash rate when it was being cut, or increased their floating rates by more than the increase in the official rate. The biggest political and customer backlash was reserve for New Zealand's Ralph Norris, who was Chief Executive of Commonwealth Bank of Australia. A effigy of Norris was burnt in Sydney and a slump in customer satisfaction ratings cost him millions in bonuses personally because his bonuses were tied to customer satisfaction.

But will it happen here?

New Zealand's bank chief executives have been cautious about moving too quickly to talk about pushing up floating rates earlier (or by more) than any increase in the Official Cash Rate (OCR).  BNZ CEO Andrew Thorburn told Gareth Vaughan in October last year that there had been a 'decoupling' between the OCR and floating mortgage rates.

But apart from a slight rise in BNZ's main floating mortgage rate to remove its discount to the rest of the market, the other big three have been very quiet.

There's a few reasons for this difference. New Zealand lending growth has been much more subdued in the last three years than Australian lending growth. Also, New Zealand bank profit margins have actually been increasing in the last couple of years.

Reserve Bank figures show retail bank net interest margins have risen from a low of 1.85% in November 2009 to a high of 2.33% in August 2011. That's because New Zealanders have been moving from being mostly in fixed mortgages, which are less profitable for the banks, to being mostly in floating mortgages, which are profitable for the banks.

However, those margins have started to edge down since August and stood at 2.25% at the end of December.

That's because of the costs of the European financial crisis are flowing through again into the cost of the banks' foreign borrowings. They have been issuing covered bonds in recent months that have cost more than 200 basis points over the benchmark rates, which is much more than quadruple the costs from before the Lehman Bros collapse of late 2008.

How much profit is too much?

However, New Zealand bank profits are at record highs by various measures, despite the slowdown in lending growth in recent years and the rise in foreign funding costs.

This debate is one between shareholders and customers. Who should bear the burden of these higher funding costs. Banks would argue shareholders expect a return and if that return falls then they may invest less in these banks, which would constrain lending and the economy.

Customers would argue that bank profits are high enough and the banks have a responsibility to support the economy.

We will find out in the months to come how this tension plays out. It will depend, in part, on how competitive the banking sector is and how much regulatory or political pressure the banks come under.

It could be argued there is less competitive pressure in Australia, which is allowing the banks to push through the rate increases. Many of the large rivals to the big banks were gobbled up after the Global Financial Crisis. However, there is also much more regulatory and political pressure on the banks not to pass it on.

The ultimate price?

The other factor to consider is whether any delay in passing on the higher funding costs is just delaying the inevitable result of the Global Financial Crisis and New Zealand's own heavy foreign indebtedness.

This may be the moment when borrowers' views on rates being forced ever lower for longer is given a reality check.

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