An open letter to:
David Hisco, ANZ
Barbara Chapman, ASB
Anthony Healy, BNZ
Paul Brock, Kiwibank
David McLean, Westpac
You each hold a position of privilege in the economic life of New Zealand.
You run a strong, stable and very profitable banking system.
Although you each say you are doing that for the benefit of the New Zealand community, the rest of us also realise your principal responsibility is to your owners and shareholders.
The international economic situation is somewhat uncertain.
But in fact, that is always the case.
In March of this year, each of you decided to hold on for yourselves part of the OCR cut the Reserve Bank announced, which were in fact intended for the benefit of all New Zealand borrowers. Two of you even held back some of the December 2015 OCR cut.
Your justification at the time was that wholesale money costs had risen and that risk premiums were elevated. You apparently could not pass all the OCR cuts on to customers because of these higher 'real' costs.
But in fact, those costs did not stay high long, and there is no longer any justification for retaining any of the December 2015, or March 2016 OCR reductions.
The table summary below shows that the OCR grab was not justified by swap rates, and nor was it justified by risk premiums
I call on you to give back the retained margin.
Directly, this affects $51.6 bln in floating mortgages, over 617,700 mortgages.
Indirectly it affects the way you price business lending to SMEs, which includes farmers.
My call is not the first for a change of heart. The Finance Minister made the same call in March and it seems you ignored him. Surely you can understand that ignoring an elected senior minister's call makes it easy for others to conclude you operate in a way that thumbs it's nose at the New Zealand public.
At the same time, some of you filled your boots with very cheap covered bond issues, bundling up more high quality mortgages for overseas investors to win some very cheap funding, the effect of which is to deny these high quality loans from backing the assets behind local savers accounts.
(Some credit is due, however. Your term deposit pricing has largely preserved savers from the full drop, imposing only about half of it on them. But is that because the local rsks are higher now, without the mortgages pledged in covered bonds?)
Your customers know and accept you are not a charity and have strong shareholder pressure to extract the highest profit you can from your customer base. But at the same time your customers don't appreciate an unjustified margin grab cloaked in the arcane language of bankers and hidden behind slick and soothing marketing phrases. And of course, you have your own internal risk pricing facilities to pump up margins from borrowers and these are very opaque. But we do know from RBNZ monitoring that your Net Interest Income is increasing and is at all-time highs (and in fact never took any hit).
You now need to give back those retained OCR cuts, otherwise some may think you are taking unjustified advantage of the dominant position you hold in the economy, and have abused the privileged positions you have.
|The track record ...||1-Dec-15||10-Dec-15||28-Jan-16||10-Mar-16||28-Apr 16||9-Jun-16||18-Jul-16||Total
|- change bps||-25||-25||-50|
|- average change bps||-20||-14||+2||-32|
|shaded cells||show margin grab|
|90 day Bank bill rate||2.85||2.75||2.70||2.38||2.39||2.41||2.37|
|- change bps||-10||-5||-32||+1||+2||-4||-48|
|Markit CDS Aust IG||125.6||125.5||143.6||144.5||115.5||109.2||95.6|
|- change bps||-0||+18||+1||-29||-6||-14||-30|
|6 mth term deposit rate||3.36||3.33||3.31||3.23||3.15||3.12||3.18||-18|
|1 yr term deposit rate||3.51||3.49||3.43||3.41||3.25||3.25||3.24||-27|
|- average change bps||-2.5||-4||-5||-12||-1.5||+2.5||-22|
By my calculations, you owe floating rate mortgage borrowers at least $40 million, being about $50 billion for 4-6 months at 18 bps, minimum. (And that ignores what you 'over-charged' SME borrowers.)
Yes, I know, $40 million is small change for the five banks involved. In a year the five of you make a tax-paid profit of $4.56 billion and that is near all-time records. But that $40 million is meaningful for your customers, and because it is small change for you, the margin grab looks even less justifiable.
If the Reserve Bank does make another cut soon to its OCR, I urge you to not only pass it on in full, but to do the right thing and give up the December 2015 and March 2016 retentions as well.
I am not seeking a response to this open letter (but if you do respond, we will publish it in full).
But it is your actions (or inaction) that will speak loudest.