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.
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