By Roger J Kerr It appears to "open-season" on the Australasian banks operating in New Zealand. The RBNZ have joined the politicians and Federated Farmers to lambast the banks for excessive profit taking on mortgage lending rates and not playing their part in taking some of the pain in this economic recession. It stumps me as to why bank shareholders should be benevolent societies to the wider borrowing public! Banks are always easy targets in tough economic times, however they often do not help their known PR image by over-complicating their responses to fair and basic questions. From Joe and Josephine Public's point of view the "quid-pro-quo" for the taxpayer providing a Government guarantee to the banks, so that they could fund themselves from international markets when it all became sticky from October to March, was that bank lending criteria would not change and bank net interest margins would not increase. Joe and Josephine might feel somewhat short-changed today as the banks themselves have stated that lending conditions and pricing has moved up (over and above the increase in their own cost of funds) in response to the economy being in recession and thus their borrowers having a lower credit standing.
Borrowers and others may jump up and down about the banks' behaviour on these matters, but unless you have an alternative debt funding source, there is not much one can do about it. All of which leads in nicely to the question of competition. Kiwibank were pricing home mortgages well under the Aussie banks up until about four months ago and providing real competition in the retail mortgage space. However, their own lending book growth and capital constraints have forced them to come off that aggressive market position. Kiwibank have not borrowed extensively from international debt markets and it does make you wonder what kind of market share they could take from the big boys if they were appropriately capitalised for an aggressive growth strategy in both corporate and home mortgage lending. The generally "hard-line" credit and lending policies adopted by the Aussie banks towards NZ borrowers through this period may well protect their profits (outside bad debt write-offs) in the short-term, but in my view, some of the Aussie banks are forgetting that most borrowers have long memories and will take their business elsewhere when the opportunity presents itself later on. One can see the current stance by the Aussie banks hurting their name and businesses in the longer run. The greater competition that the big four Aussie banks will undoubtedly have to face will need to come from domestic sources, as apart from Rabobank I cannot see any international banks expanding their lending into the NZ market over coming years. The commentary this week is confined to the bank margin part of the interest rate scene, as the Reserve Bank's monetary policy statement last week failed to add anything new, interesting or remotely compelling to their view of the NZ economy. It was a comprehensive piece of macro-economic analysis, however I still await the day when the RBNZ gurus will get into the nitty-gritty of micro-economic trends of price setting behaviour of industries and businesses in New Zealand. When they understand and report on this level of analysis they might identify where inflation actually comes from in New Zealand. The rise in swap interest rates subsequent to the statement tells you what the markets thought of the RBNZ economic prognosis and interest rate forecasts. If you look at the net interest margin today and three years earlier in 2006 between average bank cost of funds and mortgage lending interest rates, contrary to the superficial claims of some politicians, the real difference where the banks are taking larger net margins is only in the 1 and 2 year fixed rate mortgages. Variable rate mortgages and 3 to 5 year fixed rate mortgages are netting the banks the same margin as three years ago. When offering a view on interest rates and interest rate margins, one has to be very specific as to what term/maturity the comment relates to, otherwise it is nonsensical. "”"”"”"”"”- * Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com