By Gareth Vaughan
Back in August, after ASB posted record annual profit despite its lending contracting, I suggested bank home loan margins had been rising and customers ought to haggle with their bank over borrowing rates.
Today, in the wake of the country's other big banks - ANZ, BNZ and Westpac - posting near record, or in ANZ's case record, annual profits, I repeat that call.
In terms of net profit after tax, two of the four - ASB and ANZ - posted record annual profit and Westpac and BNZ, whilst short of records, recorded growth of 41% and 12%, respectively. Combined the four made 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 the anemic, if any, lending growth of today.
Sure, the banks can point to other profitability measures to argue they aren't doing that well. Westpac's 0.88% return on average assets, for example, or ANZ's 13.4% return on equity.
But that doesn't mean anything to the average borrower or saver. All they see is profits of NZ$454 million (Westpac), NZ$568 million (ASB), NZ$671 million (BNZ) and NZ$1.085 billion (ANZ). Huge numbers by New Zealand corporate standards.
Sure, these banks are among the country's biggest companies.
But as their chief regulator, Reserve Bank Governor Alan Bollard pointed out in August, the four Australian owned banks have market dominance the like of which is seen in few other economies. They account for nearly 90% of the banking sector, or just over 70% of the financial system as a whole. And although, unlike many other banks around the world, none of them needed a taxpayer bailout at the height of the global financial crisis, the taxpayer is still on the hook for NZ$9 billion through the government's bank wholesale funding guarantee and will continue to be for much of this until 2014.
When the average bank customer sees such profits they look at their mortgage and term deposit rates, scratch their heads and wonder whether they couldn't be lower, in the case of loans, or higher, in the case of savings.
Last week both Westpac CEO George Frazis and ANZ Treasurer Paul Daley told me margins on loans were higher than they used to be. Basically what they said is that fixed-term mortgages written several years ago - when credit was cheap and abundant but interest rates higher - were at much lower margins. So whether customers, when they come off them and either go back on to fixed rates, or choose to float as most are currently doing, the margins for the banks on the new loans are higher. Frazis described this as a "win-win" for both customers and banks.
On the bank side, this means net interest margins are rising, 11 basis points over the year at ANZ to 2.38%, 22 basis points to 2.33% at Westpac, 14 basis points to 2.30% at BNZ, and 40 basis points to 2.08% at ASB. And although customers are paying lower interest rates, the slice of the rate the bank pockets is higher.
Now, to be fair to the banks, all of them have just cut their fixed-term mortgage rates. The big four now lend out money in one year fixed rates ranging from 5.59% to 6.10% compared with the one year swap rate of 2.9%, which is one key rate they can borrow at over the same term, as of Friday. Their two year fixed rates range from 5.89% to 6.10% compared with the two year swap rate of 3.11%.
There has, however, been no recent cuts to the currently much more popular floating, or variable, rates with these ranging from 5.60% to 5.99% compared with the 90 day bank bill rate at 2.74% on Friday. See all bank mortgage rates here.
On the floating rate front the banks maintain they need to be cautious because their funding costs are rising against an uncertain global backdrop highlighted by Greece and the eurozone's sovereign debt woes. CEO David Hisco suggested ANZ is having to pay 200-250 basis points over swap rates for three to five year offshore wholesale funding, up from 25 basis points in 2007.
BNZ boss Andrew Thorburn raised the spectre of the banks hiking floating mortgage rates even if the Official Cash Rate (OCR) remains at its historic low of 2.5% for an extended period. Thorburn said this was because bank funding costs were linked to what banks pay for long-term deposits and offshore wholesale funding rather than the OCR. The banks get around one-third of their funding from overseas wholesale sources.
Where are the politicians?
Thorburn's comments are the sort of stuff that, coming from a bank CEO, would be an election issue in the land of BNZ's parent, National Australia Bank (NAB). But they seemingly passed un-noticed by New Zealand's politicians.
Ahead of the Reserve Bank of Australia's 25 basis point cut to the Aussie cash rate on Melbourne Cup day, Treasurer Wayne Swan was reportedly telling bank bosses to make sure they passed any cut on to customers.
They did. Albeit in NAB's case only 20 basis points. Swan described this as "a kick in the guts to working families, a "greedy decision from the NAB" and "not justified in my view by fundamentals."
But back to the funding issues. After the Lehman Brothers induced global credit crunch of 2008-09, our banks are now tasked with securing 70% of their funding from retail deposits or wholesale sources such as bonds with durations of at least one year as the Reserve Bank strives to wean them off short-term "hot money". The Reserve Bank plans to lift this core funding ratio to 75% on July 1 next year. The only bank to disclose its core funding ratio in the results round was Westpac at 80%. And despite the woes in Europe, ANZ recently raised 500 million euros in an issue of five-year covered bonds to European institutional investors.
On the heels of earlier covered bond issues from BNZ and Westpac, this is a form of fund raising we can expect to see plenty more of from the big banks because covered bonds allow them to raise money cheaper than through standard bond issues. That's because unlike with other bonds, investors rank ahead of depositors in the event of default and our residential mortgages, written and owned by the bank, are used as collateral. This means covered bonds are safer for investors and carry a lower yield.
Meanwhile, the banks don't have money pouring out their doors to borrowers. Reserve Bank figures show agriculture debt fell 0.8%, business lending rose just 1.5%, and total household claims inched up 1.1% in the year to September. Compare that with 14.9%, 13.3% and 12.2%, respectively, in 2007.
Even if lending growth suddenly spurts, the big banks are sitting on tens of billions of dollars worth of liquid assets, - the likes of cash, treasury bills, government securities, residential mortgage backed securities, bank bonds, and call deposits with the Reserve Bank. The idea is this could quickly be converted into cash to lend, or pay off maturing debt, if needed.
Term deposit rates down heavily this year
On the other side of the fence to mortgages, what's the trend with term deposit rates?
Looking at six month term deposit rates as a proxy, the ANZ and National banks' rate is down 50 basis points since the start of the year to 4%, ASB's is down a whopping 90 basis points to 4.40% although that's the best advertised rate by a bank equal with smaller New Zealand owned rivals The Co-operative Bank and SBS Bank, BNZ's is unchanged at 4%, and Westpac's is down 75 basis points to 4.25%. See all term deposit rates one to nine months here.
And since the start of the year the six month bank bill rate, what banks can borrow at, had dropped 41 basis points to 2.81% as of Friday from 3.22% at the start of the year. See more on term deposit rates here.
They have room to move
In the most recent of its twice yearly Financial Stability Reports, back in May, the Reserve Bank said the global financial crisis may have entrenched the dominant market position of the big four banks and it would monitor lending markets for any signs this was affecting the availability or pricing of loans.
Short of the unlikely scenario of the regulator actually doing anything about this market dominance of the big boys, or the even less likely scenarios of the government stepping in, or a range of smaller New Zealand owned rivals such as Kiwibank, TSB Bank, SBS Bank and the new Co-operative Bank (formerly PSIS) merging to create a new competitor with some scale, it's up to you the customer.
So if you're looking to take out a loan, renew one, or invest some savings with one of the big banks, don't be afraid to haggle. There is room for them to move. And if your existing bank won't offer you a better deal, one of the other banks might.
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