'Value transfer' from savers to borrowers expected

Business

Interest rates, house prices, regulation, costs among the key focuses for banking in 2015, Co-operative Bank CEO Bruce McLachlan says

16th Dec 14, 7:30am by Gareth Vaughan

By Gareth Vaughan

"Quite a big transfer of value" from savers to borrowers is on the cards next year given the interest rate outlook, the Co-operative Bank's CEO Bruce McLachlan says.

Speaking to interest.co.nz in a Double Shot interview on what to expect in banking in 2015, McLachlan said the current global economic picture potentially looks like a once in a life time event with the recent sudden drop in commodity prices.

"They (commodity price falls) are so substantial and so quick I challenge anyone to be able to predict what's going to happen next week, let alone in a year's time," McLachlan said.

Against this backdrop the forward interest rate picture has changed significantly over the last three or four months.

"I think we're going to see quite a big transfer in value over the next year. My personal view is that more value is going to switch from depositors to borrowers and that's based on a simple supply and demand. Credit is growing at half the rate that deposits are, and I think bank funding generally is really sound at the moment but everyone is struggling to grow their asset book. So that can only mean more competitive pressure on home loans," McLachlan said.

"So I think you'll see a continued edging down of fixed mortgage rates and that'll be paid for by similar moves in deposits."

Nonetheless with inflation probably now below 1% McLachlan suggested savers are doing "pretty well" out of their returns.

"So I think there's just a bit of a rebalancing going on there."

In terms of the bank funding picture there's currently a lot of cash in the system, he added.

" I think clearly next year though, with the fall in the dairy payout, that's going to impact the income flows quite substantially. And that will certainly change some of the picture throughout 2015. We're starting off with a really sound position so even if it changes quite dramatically through the year, I think the (banking) system's well placed to cope with that."

RBNZ house price forecast looks out of step with the market

Meanwhile, McLachlan said a recent surge in the housing market was probably inconsistent with the forecast in last week's Reserve Bank Monetary Policy Statement for annual house price inflation over the next year stabilising at about 5%.

"There's just no way in my mind that the Reserve Bank will allow house prices to take off much above that 5% level next year. So that's an area that we'll all be watching very closely," McLachlan said.

If house price inflation does rise strongly, McLachlan expects to see the Reserve Bank go back to its macro-prudential toolbox.

"They have their existing macro-prudential tools (of) which one is in place. That's in place with a (10%) level. One of the things they could do is change that level. Instead of phasing it out they could actually bring it in more powerfully," said McLachlan.

"They obviously (also) have the option of changing capital requirements on home loans, different LVRs. So the existing macro-prudential tools, given the lead time to introduce those, would be the first place that I'd be looking at that if they were going to do anything. It would be in that existing toolbox. Because the lead time to do anything else is quite significant."

The chart below comes from the RBNZ's latest Monetary Policy Statement

Regulatory 'fallout' for customers?

McLachlan suggests "fallout" from the Australian Financial System Inquiry could be very significant on this side of the Tasman.

"If it effects Australia and the Australian banks, then it's going to effect everyone in New Zealand would be my view. And I think if you look at the drivers of that regulation it's really around, particularly from a banking perspective, it's around basically requiring banks to hold more capital."

"If the levels of capital, particularly in home lending are lifted, then that's going to have pretty significant impacts through to customers in terms of the price that they pay," said McLachlan.

"Globally there is pressure on lifting bank capital levels. The Reserve Bank here have not said that that's a particular issue in this market up till now and New Zealand banks are pretty well capitalised. (But) that's the area that banks are particularly sensitive to. It can impact your level of growth, impact customers significantly, and obviously quite significantly changes the return you generate. So that's the real area of focus."

However, any changes to bank capital requirements driven by the Australian inquiry are likely to take some time, with the final report open for consultation until the end of March next year.

In terms of their cost bases McLachlan, who who had nine months as acting CEO of Westpac NZ before joining the Co-operative Bank in 2012, suggested productivity would be the focus in 2015.

"When you look at banks (and) the make up of their expense bases, personnel always makes up the lion's share... The high value jobs, the strong customer value adding jobs in banking are here to stay. Those that are more administrative in nature will just continually be taken out by technology, I think. So I think productivity will be the focus."

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25 Comments

by MortgageBelt | 16th Dec 14, 8:28am 1418671681

Fixed home loans will be down to the low 5s by early 2015, as house prices continue to decline in all areas outside of Auckland, and wages/salary decline in real terms.

Auckland house prices will continue to soar on top of immigration, offshore buyers, international students, and safe haven investment money, as well as OTT senior exec salary packges.

by steven | 16th Dec 14, 12:01pm 1418684481

Interesting to watch....

by Boatman | 16th Dec 14, 12:23pm 1418685793

Interesting too is that many Kiwis are saving faster and more than they are borrowing from Banks .

The banks are awash with cash to lend

Many people are in that postition , and will soon be looking for somwhere to invest any surplus cash . They wont want more call accounts , or more equities , bond yields are too low , property prices are too high and unsustainble and bank depoisit rates are pathetic .

There is simply nowhere else to put spare cash , other than hare-brained schemes and private equity.

by Stephen Hulme | 16th Dec 14, 9:37am 1418675860

"So I think you'll see a continued edging down of fixed mortgage rates and that'll be paid for by similar moves in deposits."

Doesn't that mean the present value of outward payments of interest and principal will be higher at lower interest rates for mortgagors, which implies a greater nearby debt burden, hence negative capital efficiency?

Meanwhile, our Swiss friends think US rates will rise, and since NZ Australian owned banks' assets to domestic deposit ratios are way north of 100%, won't the cost of foreign wholesale borrowing be rising?

“The fall in oil prices increases our conviction that the Fed will start tightening in June,” the Credit Suisse team said. Read more

by steven | 16th Dec 14, 11:34am 1418682840

There have been a lot of comments on the Fed tightening, but then that has been predicted for some years.

There was a piece from Fed Atlanta? commenting that while the drop in oil prices was good at first look (for consumers and non-oil businesses) that the NET effect wasnt.

So the good effect I just noted, the bad effects are,

a) The huge investment (ie drilling) halts or greatly in the oil sector.

b) Loss of jobs as oil sector employees are laid off as there is no/less drilling.

c) Oil sectors companies go bankrupt, see b)

d) Investors find they have lost capital due to c)

e) banks face large losses

f) Those with oil future contracts face large losses.

So the Q is, is the NET good, neutral or bad, or very bad.

by Stephen Hulme | 16th Dec 14, 12:35pm 1418686552

Hmmmm, another Keynesian inspired debt financed malinvestment debacle.

by steven | 16th Dec 14, 12:44pm 1418687088

Here we go again, its all the Keynesians fault, cant be the Austrians, or the free marketeers, the other financial parasites, or hedge funds doing naked shorts etc, etc oh no.

Right now the keynesian "way" is what is stopping us falling into a greater Great Depression than the Great Depression, despite the best chanting and dogma of the incompetant.

by Stephen Hulme | 16th Dec 14, 12:53pm 1418687630

Yeah right - you need to get out more. Read on

by steven | 16th Dec 14, 1:28pm 1418689720

Really it seems to me it has it got to "Qu'ils mangent de la brioche" from people such as yourself. That did not end well for her.

This mess wasnt caused by Keynesian economics despite what all the nutty financial sites are claiming. For the last 40 odd years we have followed the right wing mantra and all it looks to acheived is massive consumer waste, planet damage and "wealth" transfer to a smaller and smaller % of 1 at most 2 generations taht will disappear even more quickly.

"The rock is reality. The squishy place is the illusion that pervasive racketeering is an okay replacement for an economy. The essence of racketeering is the use of dishonest schemes to get money, often (but not always) employing coercion to make it work. Some rackets can function on the sheer cluelessness of the victim(s)."

http://kunstler.com/clusterfuck-nation/between-a-rock-and-a-squishy-pla…

When it all finally came apart in order to try and prevent the pain resulting from the above RB's have swung back to the only economics model that has a proven track record keynes. What happens then? Why the very same parasites with the mind set that caused this doubled down to make even more money at othes expense thinking they are excluded from teh end result due to their wealth.

I find it interesting that those with capital seem to think they are the only ones deserving of "decent returns" on their endevours. Many of the same parasites are going to find they are in deep doo doo by the look of it. If I and the innocents were not going to be picking up the tab for this I wouldnt care frankly,

http://kunstler.com/clusterfuck-nation/crash-o-matic-finance/

regards

by Stephen Hulme | 16th Dec 14, 2:30pm 1418693445

For the last 40 odd years we have followed the right wing mantra and all it looks to acheived is massive consumer waste, planet damage and "wealth" transfer to a smaller and smaller % of 1 at most 2 generations taht will disappear even more quickly.

Examples abound:

Across crisis-stricken Europe ‘ghost’ airports have freshly painted tarmac, shiny new doors and all the nuts and bolts in place - but no passengers and no airplanes, giving them an eerie aura.

Soaring costs have delayed the ribbon cutting ceremonies, as Europe’s worst recession in 100 years has killed the projects.

The European Commission dispensed millions of euro in funding to boost the infrastructure at regional airports, but they are waiting for travelers and planes that never came, and have become symbols of reckless spending. Read more

by J.C. | 16th Dec 14, 1:17pm 1418689038

Well the Keynesian worked for the Japanese, didn't it? It's shuderring to think what would have happened without it. And Japan is generally a productive nation and generate savings in the private sector and household levels.

by David George | 16th Dec 14, 1:26pm 1418689566

Well what is actually going on with the Japanese?

David Stockman rips the Keynesian theory (as peddled by Krugman) to shreds.

"According to Takahiro Mitani, trashing your currency, destroying your bond market and gutting the real wages of domestic citizens is a sure fire ticket to economic success. Yes, that’s what the man says,

“I have no doubt that the economy is in a recovery trend if you look at the long run….”

After two years of hoopla and running the BOJ’s printing presses red hot, however, there is not a shred of evidence that Abenomics will lead to any such thing. In fact, after the recent markdown of Q3 GDP even deeper into negative territory, Japan’s real GDP is no higher now than it was the day Abenomics was launched in early 2013; and, in fact, is no higherthan it was on the eve of the global financial crisis way back in 2007."

"these Keynesian preachers like Summers and Krugman, who have the government of Japan in their thrall, are downright cruel and malevolent. One of the few things that can keep Japan’s projected 35 million retirees from resort to cat food someday is their $1.4 trillion GPIF nest egg.

But under the influence of these financial terrorists—–and there is no other way to describe them—– the government of Japan has ordered that a huge chunk of that nest egg be put four-square in harm’s way. That is, be invested at the tippy top of the greatest stock market bubble the world has every seen.

Upwards of 40% of the fund is to go into equities and other alternative assets and two-thirds of that is earmarked for Japanese equities. So it is no wonder Mr. Mitani is whistling a happy tune about Abenomics. He has no choice. After all, he has been “invited” to put hundreds of billions into the Japanese stock market after it has doubled in response to an economic program that amounts to a suicide mission."

http://davidstockmanscontracorner.com/the-curse-of-keynesian-dogma-japa…

by J.C. | 16th Dec 14, 2:12pm 1418692323

Actually, what an emotional perspective. Let's look at this:

1. Japan's real GDP is no higher now that in 2007. Japan was doing well in 2007 based on global consumer spend and an exchange rate that is similar to what we're seeing right now. JPY only strengthened after the GFC because is still effectively a creditor, despite being written off by the West as a basket case.

2. The Nikkei is at the "tippy top of the greatest stock market bubble the world has ever seen"? What is this person talking about?

Why not invest in Japanese equities? Japanese companies are quite productive and profitable, despite sitting on huge amounts of cash.

How are Japanese corporations reacting to Abenomics? Have you been to Vietnam recently? FDI is dominated by Japan and manufacturing is shifting to a low-cost base. Is there something wrong-headed about this?

by Stephen Hulme | 16th Dec 14, 2:23pm 1418692984

The Nikkei is at the "tippy top of the greatest stock market bubble the world has ever seen"? What is this person talking about?

Currently not at the absolute peak (choose max display option), but a wild ride, nonetheless. Not a recommended buy and hold to eternity strategy for the elderly or infirm.

by J.C. | 16th Dec 14, 3:08pm 1418695693

So buy and hold should only be based on perpetual up cyces with peaks and troughs along the way?

People who cannot state what they mean, and opt for nonsense superlatives, need to listended to with scepticism.

by redcows1 | 16th Dec 14, 9:34am 1418675665

Was there anything in that article that is actually good for the country as a whole and will move us forward to a better place. All I read was more debt less equity less profit, the only plus was a upward value shift in already existing assets, paper profit only. I'm confused about the future.

by Your Landlord | 16th Dec 14, 10:54am 1418680486

To sum up... savers will pay for borrowers. As it should be!

by Basel Brush III | 16th Dec 14, 12:17pm 1418685432

I would loan to you but strictly at CALL only.

;-))

by Boatman | 16th Dec 14, 12:11pm 1418685088

We need to be careful about thinking that commodity price falls as sudden and sharp as we have seen, are sutainable or likely to last .

They could bounce back , because markets traditionally over-react and then pull back .

If the prices dont bounce back we could see a deflationary spiral , and thats worse than inflation becuase no monetary tools can reverse the trend easily .

I would agree with Mc Lachlan's braod outlook , but only if China slows dramatically ( which may be underway already ) and goes into a long term -slowdown.

He is right about savers , they have received the short - straw every year since 2008

by maurice24 | 20th Dec 14, 7:23pm 1419056588

I always thought that the banks got most of their funds from overseas to fund mortgages. How does that square with the claim that borrowing and lending rates here are closely linked?

Someone enlighten me!

by cowboy | 21st Dec 14, 6:30am 1419096600

They do.

The highly secure asset class gives them the security to borrow cheaply on internation loans.

But.

It's a shell game to make it look like funding is locally/OCR related.

Although to be fair, it's all dollars and fungible, so everything goes "in the pool" at some point and the rest is just a paper dance. Which is why sudden direction changes and management policies targetting specifics are often ineffectual.

by steven | 21st Dec 14, 6:40am 1419097253

At least one bank NZ CEO has admitted they hide behind the OCR. So the interesting thing in the future is when the OCR goes under 1% but the banks cant borrow it at anywhere near that and still make healthy/record profits, just what the public's backlash will be like.

Large hopefully.

by Grant A | 21st Dec 14, 8:20am 1419103217

Yes Steven, they might revolt and stop using the bank's money ...now there's a real yeah right moment.

by steven | 21st Dec 14, 10:56am 1419112605

or more likely beat up the Pollies as has been happening in other countries. OZ? USA?

Like spoilt kids? dont be silly they dont believe they'll be held responsible, but sure will whine a lot.

PS My grandparents lived through the Great Dpression and my parents were born during it. The scares of that seem to run very deep, never to be erased, Ive always found that sobering.

by Grant A | 21st Dec 14, 8:24am 1419103477

Maurice. - people try to complicate how banks operate far too much. In fact they borrow at he cheapest possible rate they can within the boundaries of the regulations they operation in, and lend it at the highest possible rate that their competitive environment will let them i.e. They try to have the lowest possible cost of goods and the highest possible selling prices, just like every other business in NZ - charities operate differently.