BNZ CEO Andrew Thorburn says banks likely to hike floating mortgage rates even if the OCR stays at 2.5% for an extended period because of 'decoupling'

BNZ CEO Andrew Thorburn says banks likely to hike floating mortgage rates even if the OCR stays at 2.5% for an extended period because of 'decoupling'

Bank of New Zealand chief executive Andrew Thorburn.

By Gareth Vaughan

Bank of New Zealand CEO Andrew Thorburn is warning that even if the Official Cash Rate (OCR) stays at its record low of 2.5% for an extended period, banks floating mortgages, currently all the rage with home loan borrowers, will probably rise because banks' cost of funding is likely to increase.

Speaking to after BNZ reported a NZ$69 million, or 11.5%, rise in annual net profit after tax to NZ$671 million yesterday, Thorburn said whatever happens to the OCR, there's the "real possibility" of floating - or variable - rates rising due to an increase in the price banks pay to borrow money through term deposits and overseas wholesale funding markets, which they then on-lend to their customers.

"I think yes, there will be over time, leaving aside whatever happens to the OCR, the real possibility that floating rates will go up because of that rising cost of funds pressure that the banks face," Thorburn said.

"I don't think there has ever been a direct link between the OCR and floating (home loan) rates or business interest rates. Because the floating rate is the overnight cash rate, it's obviously the risk free rate and that's at 2.5%. As the term and the risk goes up the higher the rate. What I'm saying is I don't think it has ever been coupled because over the last few years as banks funding costs have gone up, that has been fed through to rates immediately, particularly on the business side."

Nonetheless banks hiking their floating rates against a backdrop of a 2.5% OCR would likely see them come under criticism.

In Australia a year ago the Ralph Norris led ASB parent Commonwealth Bank of Australia (CBA) came under sustained fire from politicians, the media and the public after lifting home loan rates by 45 basis points on the back of a 25 basis points hike to the cash rate by the Reserve Bank of Australia. And a year earlier Westpac, CBA and ANZ did the same with Australian Treasurer Wayne Swan saying they had no justification to do so.

'It costs BNZ between 5% and 6% to borrow money'

Thorburn said it was currently costing between 5% and 6% for the BNZ to borrow money. He noted a five-year term deposit rate of 6% and said when wholesale, largely overseas, funding markets open again properly - when investors are comfortable the European sovereign debt crisis is under control - BNZ will probably have to pay "a similar number" to secure funding.

"What that means is that needs to be fed through sensibly to borrowers because that's the way the bank stays profitable, keeps its capital high, and retains strong (credit) ratings to be able to continue to function really well and lend to businesses," said Thorburn.

"So that margin is important for us."

He said just as fixed-term interest rates follow moves in swap rates of the same term, so floating rates will move with the bank's cost of funding. And Thorburn said in his view it was 'definitely" a rising interest rate environment.

The Reserve Bank yesterday left the OCR at 2.5% and said if global developments have only a mild impact on the New Zealand economy, it is likely that gradually increasing pressure on domestic resources will require future OCR increases. Reserve Bank Governor Alan Bollard also commented on funding costs, saying: "The difficult international market conditions could also result in increased New Zealand bank funding costs over the coming year."

Many economists, including BNZ's, are picking the OCR to stay at 2.5% until mid-2012. The OCR has been at 2.5% since March.

Unlike ASB, BNZ's profit still lags boom

At NZ$671 million, BNZ's annual net profit after tax still trails the NZ$785 million it posted at the height of the recent boom in the year to September 2008. ASB, the only other bank to report its annual results so far this year, posted record annual profit of NZ$568 million. BNZ's cash earnings, meanwhile, rose NZ$88 million, or 17%, to NZ$612 million.

Thorburn said during the year to September BNZ increased its share of the housing lending market to 16.2% from 15.8% (housing comprises 48% of BNZ's total lending), agribusiness to 20.5% from 19.2% and business lending to 26.5% from 25.8%. With retail deposits up NZ$2.8 billion, or 10%, to NZ$31.1 billion, BNZ's deposit market share of 18.2% was at an "all time high."

The bank's gross loans rose just 2% year-on-year to NZ$55.9 billion and total assets 1% to NZ$58.1 billion. BNZ's bad and doubtful debt charge fell NZ$36 million, or 19%, to NZ$151 million. Just 1.51% of BNZ's gross loans were 90 days past due or impaired at September 30, down from 1.96% at March 31.

Meanwhile, BNZ's net interest margin increased by 14 basis points to 2.30% over the year, and by 11 basis points to 2.35% in the second half-year as customers switched to floating mortgages from fixed-term ones and loans were "repriced" to fit market conditions. Chief financial officer Ken Christie said nearly all customers taking on home loans were currently choosing to float with 60% of the bank's home loans now on floating rates, which is slightly above the overall industry figure of 56%.

Banks tend to do better out of floating, or variable, mortgages because the margin between the variable rate and short end of the yield curve, such as three month bank bills, is higher than the margin between swap rates and fixed rate mortgages.

Reserve Bank figures of monthly bank net interest margins show they have risen to 2.35% by August from 2.18% in May and 2.11% a year earlier.

'Despite weak lending growth we want to raise money to strengthen our balance sheet'

BNZ's net operating income rose 6% to NZ$1.77 billion and operating expenses rose 2% to NZ$747 million.

Thorburn said the domestic deposit market remained competitive with the big banks all wanting to strengthen their balance sheets by growing retail deposits. This competition stems from the Reserve Bank's core funding ratio (CFR). Introduced in April last year as a move designed to reduce New Zealand banks' reliance on short-term overseas borrowing, the CFR sets out that banks must secure at least 70% of their funding from retail deposits or wholesale sources such as bonds with durations of at least one year. The central bank lifted the ratio to 70% from 65% on July 1 and will increase it again, to 75%, on July 1, 2012.

According to auditing firm PwC's latest Banking Perspectives report, the big four banks - ANZ, ASB, BNZ and Westpac - plus Kiwibank obtained 36% of their funding from overseas in the first halves of their current financial years.

Lending growth is expected to remain weak. BNZ picks a 1.6% 2011 rise in systems housing lending growth and 2.4% 2012 rise, a 0.9% 2011 drop in personal loans and 1.3% 2012 rise, a 0.7% 2011 drop in business lending and 1.9% 2012 rise, leaving total systems credit growth of just 0.6% this year and 2.1% next year.

But despite not needing a surplus of funds to meet lending demand, Thorburn said BNZ always wants to bolster its balance sheet.

"So when offshore (funding) markets function properly again, we will want to re-enter to raise more money. Not because we think it's needed imminently, we're prepared for (lending) growth if it does happen, but because we want to keep strengthening the balance sheet of the bank."

BNZ's tier one capital ratio was 8.99% at September 30, up from 8.49% at June 30 and well above the Reserve Bank mandated minimum of 4%. Its total capital ratio was 11.84%, up from 11.24% and ahead of the 8% regulatory minimum.

See all advertised bank term deposit rates here and see all advertised bank mortgage rates here.

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So the old tune of a rising OCR forces us to raise rates is now obsolete so there is a new tune to whistle....Assumption on the fact that ppl want to borrow in a depression.....they dont....


And we are shifting deposits to banks in aussie!...30 day there is 2% higher than here!

Wolly: Thanks, that reminded me. It's better than that. The mainstream banks ANZ, NAB, CBA offer online-saver accounts, on-call, no fixed term-deposit stuff with honeymoon rates of +6.0%. Only issue is the honeymoon only lasts for 3 or 4 months. Then you have to remember to ring up and wheedle an extension of the honeymoon rate, or tell them you'll move it. They soon fix it up. check it out at go down the bottom of the page and click on "savings"

Thanks, just compared Rabo bank. Aust compared to us, worth a look just watch the tax on   currency gain, can give you a shock.

I tried to open a Rabo bank account in aussie.  You have to be an australian resident to open one with them.

I managed to open a citibank account. Took bloody months and was a real drama.



Yes, we're sick and tired of waiting/pushing for the OCR to be put up. We'll just fire ahead and hike the floating rates up anyway. 


Please explain ?

Either Thorburn is Lying , I am dumb or I am missing something . I have $105,000 which I took out of Rabobbank and the BNZ offered ne 4,5% so I dont see how its costing him 6% to borrow money as he claims 

I concede that his Weighted Average Cost of Capital to fund the Bank may be more than I am getting , but there are many BNZ accounts that are earning way less than 4% on credit balances.

Another point woth making is that the Banks' massive margins on unsecured lending , credit cards , personal loans and business finance, overdrafts and loans are well into the teens, so  their margins are far greater that any business could dream of in New Zealand . 

Little wonder the banks continue to report  massive profits in the worst recession in 100 years 

Andrew Thorburn is right that eventually bank funding costs from foreign funding will rise if this European financial crisis drags on into next year.

But the key is what happening to net interest margins, which is the end result of how much the banks charge on lending minus all the banks' funding costs.

The move to floating is actually increasing those margins, as the RBNZ figures referred to above show.

BNZ and the other banks would only be justified in increasing floating rates if those net interest margins were falling.

They are not yet...they're still rising



I put a big term deposit with BNZ last month. 6% for 5 years.

The lady at the bank offered me monthly interest without me asking.

6% is the best rate that they offer at the moment on term deposits so their average cost must be less than that.

Unless they are counting their bonds in their calculations that pay me 9.1%.

Perfect, WAS! And when the fixed term lending rates are down below 4% you will be able to do a compensated mortgage against your term deposit ( they'll probably even let you offset the interest rate payable/receiveable to avaoid RWT; but if not, your accountant will sort that!) and lock in the arbitraged difference for several years....

This is our ever so small equivalent to the US where bank CEOs try and defend increasing profit of 10% per year.  Sure we don't have the excesses they have in the USA.  The whole system is buggered!

In the absence of any balance sheet growth or any economic growth banks like BNZ should not expect to increase profit year on year.

Andrew is basically saying "Look we need to increase our profits so I get my bonus.  The volume isn't there to do it, so we are going to increase margins."

At the moment gross margins of mortgages are running close to 3%.  Even allowing for a cost of funding premium of 1.50% would still mean margins of 1.50%.  At the height of the boom BNZ was happy with a margin of about 0.70%.

The problem for banks is how to make record profits when the economy is tanking.  You will see a lot more of them and their merry men (economists) taking this line over the next 12 months.

Snippy - what bank can borrow at 2.5% ? In can what bank can borrow overall below 4% ?

Future funding will be one to watch....however right now the NZ Govn seems to be borrowing at lower rates....if our banks are truely sound then they should also see a similar outcome.

Interesting thing on Japan, savers get virtually nothing in interest....and here we are with the (future) Govn expecting/forcing us to save....the Q is with what return?

Given the % wants of management fees on top of a low gain, kiwisaver could end up as nothing more than a subsidy to the insurance / pensions industry on the condition that that in turn it is a subsidy as it will be lend it where the govn wants it....lent. 

Give Kiwisaver a few years of crap returns and the voters will be questioning just where their money is going....the hot election promise could well be removing the compulsory aspect at least.....

In terms of 6% mortgages yes I wonder if they can go lower without a depression and deflation of 10% per annum......then the OCR will be <1% the Q is then where will the retail rate be...

For me the danger signal is bank profits are not only not down but a recession/stagnation that shouldnt be happening....IMHO.



Yes banks would love to give the Ma n Pa kettles a good rorting.A good hike in the rates is what they clearly need.Banks need people who work an get paid regular money.The people don't have any money,the cost off living is sucking all the money out off the system.

Low rates has kept many working people with families from sinking.

The banks need new blood,they have the customers who owe them money already.

Bit like the casino sucking up all the welfare money,there is'nt any more in the system.

It is very difficult to earn extra income in NZ.This is why the black market is massive,nobody wants to pay the GST.

Take a look at the housing stock in NZ,just about every house needs a new roof.

People have been patching up things for 60 years,leaky homes all need major work.

Lift the rates an dollar would move to parity against the US.

No easy fix as there is way to many unemployable people that are sucking this country dry.

Big changes will have to take place,no working tax payer wants to pay out for this welfare merry go around.

Lift the rates an things would slow down even more.


Australia RB about to cut their OCR  - according to 11 of 17 economists ....

Mind you they are on 4.5 ,  highest in developed world outside of Asia.  

And across the ditch: Staff of Treasurer Wayne Swan have telephoned bank executives to demand that any official rate cut this week be passed on in full, the Australian Financial Review reports.

Just watching concrete foundations being poured on a new house across the road (while working from home). Young family taking the plunge on a new build -  section $199,000 - house probably 300+ .  Part of a newly sub-divided site  -  850 m2  sections in Napier.   3 sections out of 4 sold.   1 started building.   So looks like people are getting on with their lives despite the doom & gloom   -    Low mortgage rates (relative to historic levels) probably helping people to build a new home.  Should provide work for tradies etc ...

You RE agents and property developers are gonna have to come up with better spin. Right now the crap you're peddling is hopelessly unrealistic and obviously just more of your old bullsh*t. You'll never talk the market up again that way.

Actually I have no association with RE or property development. I am simply a salaried citizen looking out my front window! 

(OK - well I am hoping my house RV increases, surely doesn't make me a developer). 

The house being built is on a section which has roughly retained 2007 market value. The new build will be 300-350k.  So a new house in provincial NZ in a good suburb still 500-550k.  Which part of "quality property is not going to devalue drastically in NZ" don't you understand?     

It's the $199k for the section that's going to lose it's 'quality' price. In a country with so much undeveloped  land, that has to happen. Same will happen in Oz.

Mate who is going to believe you? This place is infested with 'undercover' real estate agents and with developers -- it always has been. True there have not been so many active lately with the property market drilling it's way down to the centre of the earth but they are still around and easy to spot -- they are the ones who sound all chirpy ( very falsely!! ) and try to paint a rosy picture of the property market!

Ha ha quite funny to be mistaken for a PI! Maybe I exuded too much positivity on a sunny day in hawkesbay. Watching a new house being built is like hearing a young couple is having. A baby. An expression of hope. Yeah well section $$ may go down but Materials ar still expensive, tried building a fence lately? 1000s of $$$