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More margin growth expected for Westpac from its 'win-win' of mortgage customers taking up lower rate, higher margin loans

More margin growth expected for Westpac from its 'win-win' of mortgage customers taking up lower rate, higher margin loans

By Gareth Vaughan

Westpac New Zealand's net interest margins, which rose 22 basis points in the year to September, look likely to continue rising if floating rate home loans stay in favour with customers.

Speaking to after Westpac yesterday reported a 41% rise in net profit after tax for the year to September 30 to NZ$454 million, CEO George Frazis said only about 48% of the bank's NZ$34.9 billion worth of home loans was on floating rates. He said customer preference saw the proportion of home lending done via floating rates move to 47% from 33% over the 2011 financial year.

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. See more on this here. Westpac's net interest margins rose 22 basis points across the 2011 year to 2.33% and 9 basis points in the second half-year to 2.38%.

However, the percentage of the bank's home loans on floating rates - where the rates on offer have been lower than fixed-term rates - trails the Reserve Bank's monthly sector wide figures for September which have NZ$97.652 billion, or 58%, worth of the industry wide total NZ$169.666 billion worth of mortgages floating. That's a record dollar value of mortgages on floating rates and equal record percentage since the Reserve Bank's records began 13 years ago.

So at 48%, Westpac has less of its home loan book on floating rates than rivals and probably further to go in terms of switching.

"From what I can tell we've got a bigger proportion still on fixed (rates) compared to our competitors," Frazis said.

"As you've had customers go off the historical fixes to either the current fixed or the current variable (rates), it has been a win-win for both the customer and the bank. Because basically the interest rate is lower so the customer gets a benefit and the margin more reflects the risk. Effectively banks were under pricing that risk historically." (The switch has also been good news for Reserve Bank Governor Alan Bollard).

More to come

And Frazis expects Westpac's margins to continue benefiting for a while, especially from the move to floating rates.

"We still have some way to go over the next 12 months on that," Frazis said. "Effectively that's likely to run its course in the next six months, would be my guess. We don't comment on margins going forward, (but) my sense is there will be some benefits coming out of the continued roll off from historical rates to current rates."

Westpac's main rivals all have a bigger slice of their home loan books on floating rates. ASB said 59% of all its home loans were on floating rates at June 30, up from 37% a year earlier. ANZ, which is due to report its annual results today, said 60% of its home lending book was on floating interest rates as of mid-July, up from 42% at September last year.

BNZ said last week nearly all customers taking on new home loans were currently choosing to float with 60% of BNZ's home loans now on floating rates. And Kiwibank CEO Paul Brock said 56% of his bank's total home loans were floating at June 30, up from about 38% a year earlier.

Westpac offers a 5.60% floating rate. After cuts to its fixed-term rates in the last week, Westpac now offers a 5.59% six month and one year rate, 5.89% two year rate and 6.45% three year rate. The other major banks - Kiwibank, ASB, ANZ, National Bank and BNZ advertise floating rates ranging from 5.65% to 5.99%. Their two year fixed rates range from 5.89% to 6.45%. See all advertised bank home loan rates here.

'Not sure what will happen to floating rates'

Meanwhile Frazis was non-committal on the outlook for floating mortgage rates. His counterpart at BNZ, Andrew Thorburn, last week told that even if the Official Cash Rate stays at its record low of 2.5% for an extended period, banks' floating mortgage rates will probably rise because banks' cost of funding is likely to increase.

But Frazis said it was hard to tell what would happen to floating rates.

"It's something that we assess continually on a week by week basis. We're comfortable with the rates where they are at the moment," said Frazis. "But the trend, if you look at what has happened in Europe, is that the cost of funds is increasing."

"The issue we've got to assess is; is that a short to medium term spike or a more longer term shift in the cost of funds? We'll be making that assessment over the next three months or so."

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Perhaps the lower % of Westpac customers on floating is not so much due to customer choice but because the Westpac break fee was more punitive than some other banks?  Also they seemed to have a policy of discouraging existing customers of breaking from fixed rate mortgage segments.  

In 2010 when you weighed up breaking from 8.4% to floating against waiting it out for 2 years on fixed -  and then customers were getting mixed messages or the message of hikes coming - then a lot of people gave up and resigned to staying on 8-9% fixed.

Due to these issues perhaps less people will want to go back to fixed even if rates move up a bit.


Mortgage Belt - The lower % might also have something to do with the fact that Westpac is also a corporate bank and a high % of its debt is to corporates who have treasury policies and prudently, and through policy, will never punt their whole debt on the floating rate

Break costs calculations in my experience were done incorrectly by a couple of banks whos incorrect loan documentation saw them take a bath in the 2008-10 break period. I think Westpac was one of those doing it correctly and as far as I'm aware one of those that never had to defend a break cost legally because it was doing it correctly as were most but not all banks. Its not hard to calculate/check

People who want to stay either fixed or floating because they dont understand interest rates, and interest rate break calculations, shouldn't be borrowing.


GA -  Not sure if the average home owner really understands all the influences on interest rates.  Most peoples' historic knowledge is to keep fixing for 2 - 5 years to mitigate against constantly rising rates. The 2008/2009 sudden drop caught everyone by surprise - I can't remember another time in the last 20 years when you could get so badly trapped on 5 year rates!   Good learning curve I guess   -  split up your mortgage in 6 segments and rollover different fixed portions and some floating seems to be a good risk spread.   Personally, I'm staying on floating -  just can't decide whether/when to fix again.  


Understand what you mean Mortgage Belt, I got caught myself and didnt break because of the uncertainty as to where the eventual bottom would be- no one really picked it at 2.50%. But I'm also concious that it was an historic event, and whilst I don't believe that we will see rate rises before the Mar-June area that most are now talking, I'm appreciate that fixed rates will rise early once that gets more obvious and closer,  and that there is a real risk of a quite sharp rise from the RBNZ when they decide to go - I think they are being rightfully cautious and happy to take a risk that they get behind where they should be until that point is reached, and then go hard - I want to be well fixed before then 

The world is an dangerous place these days and quite artifically pumped up by massive liquidity injections over the past 2-3 years - its totally unpredictable and market shocks will continue to come, and at some point that might well be with higher than expected rates. At these low levels I'm not going to get caught out the other way around this time