By Gareth Vaughan
Australia's other big banks will probably follow ANZ's lead and move to review housing and small business floating interest rates monthly independent of the Reserve Bank of Australia's Official Cash Rate (OCR) announcements, UBS banking analysts say, heightening the likelihood of their New Zealand subsidiaries ultimately following suit.
In a research report entitled The hare and the tortoise UBS's Sydney-based analysts Jonathan Mott, Chris Williams and Adam Lee say ANZ's move, announced in December, will provide the bank with a much more effective mechanism of managing its funding costs and net interest margin as well as break away from the "political circus" of expectation that its standard variable loan rates will track movements in the RBA's OCR.
"We believe that over time the other major banks are likely to follow a similar process of managing customer’s interest rates as ANZ," Mott, Williams and Lee say.
"However, given first mover disadvantage in setting the Standard Variable Rate, there may initially be some gamesmanship. For example another major may decide to announce their interest rate changes on the third Monday of each month (ie after ANZ's announcement on the second Friday of the month)."
"However, over time this arbitrage will eventually be eliminated (ANZ could also change its announcement date) and we may potentially reach a point where each of the banks announce their interest rates simultaneously, in a scheduled manner," the analysts suggest.
ANZ's first announcement under its new scheme was made last Friday, when the bank said variable interest rates for retail mortgages and small business lending would remain unchanged. Philip Chronican, ANZ's Australia CEO, says by reviewing variable lending rates each month the bank can more accurately reflect changes in funding costs it faces through the interest it pays to customers for their deposits and to investors in wholesale money markets.
A spokeswoman for ANZ NZ, which operates the ANZ and National banks, told interest.co.nz before Christmas there were no plans to move to monthly floating interest rate pricing announcements in New Zealand. That said, she said ANZ NZ agreed with its parent's view that interest rate considerations for banks include many factors other than just the Reserve Bank’s OCR.
'OCR and bank rates decoupled'
BNZ holds similar views with its CEO Andrew Thorburn telling interest.co.nz last October even if the OCR stays at its record low of 2.5% for an extended period, floating mortgages could rise because banks funding costs were likely to.
"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," Thorburn said.
And Catherine McGrath, ASB's executive general manager for strategy, payments and product, says the OCR is merely one of a number of factors ASB considers when setting variable interest rates, alongside its offshore and onshore funding costs including the "continuing pressure" on retail deposit rates.
Any movements in floating mortgage rates this year will have a big impact on home loan borrowers given, based on the latest Reserve Bank figures, NZ$143.053 billion, or 84%, of the country's total NZ$170.610 billion worth of mortgages are floating or fixed for terms of less than one year. See more here.
Political footballs making record profits
The UBS analysts point out that banks have always been able to reprice their floating rate mortgages. But in Australia there has been "substantial political pressure" for the Standard Variable Rate to track movements in the RBA cash rate. This was visible after the RBA’s 25 basis points rate cut in December where Treasurer Wayne Swan accused the banks of insulting their customers by dragging their heels on passing on the RBA cut.
The UBS analysts argue, however, that banks funding costs have "very little correlation" to OCR movements.
"This implies that if banks blindly passed through RBA cash rate movements across their loan book, the net interest income would come under significant pressure as funding costs rise."
For the year to September the ANZ Banking Group posted a record annual cash profit of A$5.13 billion and ANZ New Zealand made a record annual net profit after tax of NZ$1.085 billion. The big four Aussie banks made a combined record A$25 billion annual profit, and in their last financial year their New Zealand subsidiaries made combined net profit after tax of NZ$2.778 billion.
That's NZ$78 million, or 3%, higher than their combined profit in the boom year of 2007 when double digit lending growth was the norm compared with more recent anemic lending growth. In New Zealand ANZ, ASB, BNZ and Westpac all recorded annual rises in net interest margins, up 11, 40, 14, and 22 basis points, respectively.
Meanwhile, UBS's Mott, Williams and Lee maintain a simultaneous announcement of interest rates by the banks, well after Reserve Bank rate setting meetings, would be "very positive" for the industry structure.
"This would enable the banks to more effectively pass through additional funding costs to the customer and manage their net interest margins, while maintaining the competitive dynamics of the market."
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