David Chaston calls on the five main banks to give back the full OCR cuts from December and March now that it is clear the 'higher costs' claimed never materialised or have since faded

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
over
period
  % % % % % % %  
RBNZ OCR 2.75 2.50 2.50 2.25 2.25 2.25 2.25  
- change bps   -25   -25       -50
                 
ANZ 5.99 5.74 5.74 5.64 5.64 5.64 5.64 -35
ASB 6.00 5.75 5.75 5.55 5.55 5.55 5.65 -35
BNZ 5.89 5.79 5.79 5.69 5.69 5.69 5.69 -20
Kiwibank 5.90 5.65 5.65 5.45 5.45 5.45 5.45 -45
Westpac 6.00 5.85 5.85 5.75 5.75 5.75 5.75 -25
- 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
                 
For savers:                
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.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment or click on the "Register" link below a comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current Comment policy is here.

38 Comments

Yes they make obscene profits; far greater than is warranted from what real contribution that they make to society. However, given the significant risk that the housing bubble will burst sometime inside the next 2 years, should we be lowering the interest rates further and inflate the bubble further? Lower interest rate rates are just going to encourage more first time buyers into the market at a time when even the government is issuing not so veiled warnings not to.
I would rather that the Reserve Bank required them to increase the capital that the share holders have invested in the banks to buttress the banks against :

Property bubble bursting

The strong possibility that the Chinese economy implodes

The possibility that Europe falls into recession following the Brexit turmoil

And heaven knows what could happen if Trump is elected (I note that he is now edging ahead of Clinton in the polls and momentum is on his side)

Increasing militarism in China and Russia

In fact, I would require the banks to significantly increase their capital investment to the point that interest rates had to be raised 1 or 2%

Well said Chris-M. Banks are an unnecessary evil to most people but for them to be lending cheap money as they were in 2007 would be irresponsible. The banks are at the stage of the cycle where they are becoming more cautious on how much they lend to protect their Tier 1 ratio. To me that is positive rather than negative.

A 'sky is falling Henny Penny' view regarding the world economy and yes we should lower interest rates to reflect the long term inflation contagion and relieve hard working households. Get people onto the ladder - house prices are not going to go backwards, stabilise maybe, but not backwards. Withholding interest rate cuts is seriously manipulative and selfish governance striking at the core of what has previously been largely a social and economic equitable country.

up
14

we need higher interest rates that reflect the risk profile of the lending, with 40% going to investors

Really, David, Chris-m? Do you seriously think these five banks aren't in intense competition? I certainly don't - my observation is they are all keen for market share, but face strong pressure from regulators to strengthen their balance sheets, to ensure future governments don't have to bail them out. And anyway,mif banks are making super profits, why don't you just increase your mortgage and buy some bank shares?

Don't see any competition on floating rates. The real competition is all on fixed rates and that $171 bln part of the market. Floating rate loans are a competition-free zone and banks seem to be taking advantage of this 'replicating portfolio'.

There is no competition Dave 2. I'm sure the foot soldiers in the office are told they are competing. But there is also something called like "yield management". So competition is subordinate to profit. Best way to do that is stay in line with the rest. Not hard to do, You don't even need the smoke filled room.
I say break them up. The big four becomes the small twenty. And we need some non -symmetry. Different ownership patterns, some working in specific regions etc

Sounds like the finance companies we had pre 2008. Of course yield is managed to generate profit. The only issue is monopoly power and use of that for super profits. That's not happening - what is happening is all the banks scrambling to cut costs and drive profits so they can accumulate the increased capital they need to hold, and that has become their priority. They'll do a pretty good job of breaking themselves up - UDC is rumoured to be on the block, and plenty of digital new entrants around the corner like Google, Xero.

up
13

How about an open letter to declare the correct non resident buyer data now instead of waiting as all national policy is based on it which if wrong implies that national policy on demand side of housing crisis is wrong.

Does people have right to have correct factual data to avoid jumping to conclusion. May be government is correct and everyone else is wrong. Will it not help to put a full stop to all debate about non redident money and prove national government is right.

up
11

The non resident buyer data was correct AMAN.

Its just how the media interpret it.

4% buyers non resident
35% buyers temp visa workers or foreign students
Total foreign persons =39%

Nz media focussed on non resident (like you incorrectly are) yet in Australia they focus on foreign person. Foreign person includes non resident + temp visa workers + foreign students.

Big difference one is 4% and other 39%. Australian new stamp study is applied to foreign person. The sooner people in nz drop the term non resident the better. A way to buy property is to send your children to nz to study then buy through them.

Ask yourself this question. Are you more likely to buy in a foreign land if you had someone you know living there such as a son or daughter. It astounds me that the 35% category was completely ignored yet these people are not permanent residents. In australia they are labelled foreign persons and are taxed accordingly. They are also restricted from buying existing properties.
Wake up NZ.

How about an open letter to NZ media to report in the same fashion as Australia. Report total foreign Person not just non residents.

David great letter.

Joe, you are correct and everyone knows but the government is not accepting as questions were not properly framed and are hiding behind it.

Non resident buyer includes overseas buyer, students, short term work permit and any other short term.

We all knows but national party is not accepting.

up
13

I call on the rbnz to change their open bank policy so that us depositors dont have to lose our hard earned money WHEN these crooks go belly up. I call on the govt to change the law so that the money i deposit remains in MY OWNERSHIP. As it stands as soon as you deposit the money, you recieve a Bank PROMISE TO PAY. Ownership of the money transfers to the bank as soon as you deposit it. Nice cashless society we live in. Tge crooks that designed and operate this system want our money to pay their debts. Its completely legal too. So is your money safe? And when your direct debit card stops working then what? Impossible you say? Ask anyone in Ireland...they had a "mysterious" direct debit card issue recently. They create money out of thin air, pump up the housing prices and extend easy credit and then they put out articles to say ohh they care about us and are worried about our borrowing. Well it takes two to sign a loan contract to bring money in existence. The bank leverage is atleast 10/1. Ina bank run ALL banks are insolvent. The emperor has no clothes. Wake up new Zealand

I recommend you take an Economics and Finance course. Might shed some light on why such systems exist. Good luck

Sorry but we are all unavailable for comment at the moment.
We are all on an all expenses paid break to the British Open and because the weather over here has been so atrocious our sponsor(you)has agreed to send us to Rio to watch the games.
However please be aware your concerns will be dealt with as soon as possible with our usual great gusto.
TA TA for now.

Brexit may be the last straw that breaks Deutsch bank. That banks share price hit a 30year low last week. Many commentary says they are insolvent. 19% of Deutsch bank revenue comes from the uk. Hence the recent collapse in their shareprice. Deutsch bank holds 60 trillion derivatives. If Deutsch bank goes belly up, watch out for contagion to the 5 US banks whole also perform derivatives trading. And then you have all of italys banks that need a bailout. And then there is china...4 of the worlds top 5 banks are in china. All those chinese loans for all those ghost cities. Similar theme here.... banks banks banks. Hands up those with an overvalued house. Are you prepared for what is coming?

up
11

Best job I the world would be bank CEO. Paid $5million+ per year to provide a service that everyone has to have without question, non performance based, bailed out by Goverment if risky lending turns sour. Do it for 6 months, set for life. All care, no responsibility....How long can we workers put up with this rubbish system? Get paid on average $50k a year, get fired if we make a mistake, get sued if we make a bad mistake, slaves to the banks and out of control housing market. These conditions can't last. There must be backlash..

I actually agree with you on that point, the real squeeze is actually in what used to be the plumb senior manager roles two levels down from CEO are now paying peanuts compared to ten years ago, the middle managers are getting fleeced...

up
14

We see a very similar phenomenon with respect to petrol prices. Where I live, all companies charge the same, and all change their prices within hours of any of them changing their prices. When international oil prices fall, everyone plays dumb, leaving prices the same and thereby increasing their margins. When the NZ dollar rises, everyone plays dumb, leaving prices the same and thereby increasing their margins. However, when international prices rise or the NZ dollar falls, petrol prices rise more-or-less instantly.

In other words, when you have a cartel of corporations and a government that acts as an agent for corporations you can pretty much do as you like.

It is abundantly clear that everything we have been witnessing over recent years -from manipulation of interest rates to squandering of energy and resources and mass migration- is leading to a very bad ending for everyone.

If state sponsored corporate arrogance is a given, I guess one can assume, the only option is to bail out the banks without “bailing in” investors?

Actually, that is plain wrong. There is quite a variety in pump prices. See here.

In Auckland, the range between companies is from $1.599/L to $1.789/L for 91 unleaded. And that is only for pump prices.

Discounts lower it from there and discounting is rife. Our weekly monitoring can show you how much that averages over the country, and that is approaching 15c/litre, an all-time high.

You just need to shop around.

We are currently paying about the same price we were paying in December 2007 ! The 'real' price drop is pretty impressive. (No wonder Shell sold out in New Zealand.)

I love it how you attack the banks and then defend the fuel industry with a remark I easily use on your open letter:

You just need to shop around

Just as a BP off the motorway will function as a toll gate to all that pass, a bank can use floating rate mortgages to charge people a rate that is higher than they could find with the smallest of effort. Banks will fall over themselves to offer 1% off their advertised floating rate, not to mention close to 1% cash up. Maybe you are right.. and banks are taking advantage of things but you show me the increase to the banks net interest margins as a whole rather than this speculation. As i have said before on this site, ours are lower than Australias and low globally.

I would also love to see you put total margins (price less raw cost and tax) over time and tell me which industry has got less competitive over time.. I'm pretty sure in percentage terms its not the banks

the most expensive petrol is at the airport you can pay an extra 20 Cents a litre or drive 2 kms in any direction and get better value .
my point being if businesses know they can mark up and people will still buy they will

Quite right David. I live in Auckland's eastern suburbs and usually buy my petrol in Mt Wellington where it's often 20 cents per lltre cheaper than the staiton 5 minutes closer to my home

Aman key is non PERMANENT resident buyers.... which is equivalent to foreign person in Australia.

The question is not what we are paying relative to 2007 or across the country. The real question is what are the margins like in nz compared to overseas. That's the only way we will know if getting ripped off or not.

The biggest single component is tax, which makes inter-country comparison tricky.

Good effort David, but will they heed your call?
Banks' assets are mainly loans secured by property values. New Zealand real estate has attracted international investors for a few decades now, and in the past few years it has gone ballistic. It's not hard to foresee a continuing boon in real estate for years to come, at least until interest rates rise enough to warrant other investment options. Until then, real estate speculation is king by design and we know who the designers are. The world is awash in cheap cash and the main beneficiary has been real estate the world over. Especially in commodity currency nations like Canada and New Zealand, and underdeveloped countries in Latin America and Asia.
A case in point is a beach house in Lima-Peru that sold in late 80's for US $15,000 is for sale for US $ 450,000 today. Mind you, a large section of this population live on a few dollars per day. This was a very good investment at the time, but I would not touch it today. Locals can't afford these properties, only foreigners buy them. This will come to an end.
Another case in point has been Raglan, New Zealand. A house that sold for NZ $280,000 in the 80's, and then for NZ $1.2 million in 2003, has sold last week for NZ $4 million. Both these properties have doubled their value every 4 years, tax free, in both countries, Locals can not afford these properties either, and the boon will end.
What we are experiencing today, the world over, has been in the making for centuries, and "banksters" won't give the loot back. Why should they? It has not been easy to position themselves at the pinnacle of this pyramid scheme of their own creation. The central banking charter they dreamed up, designed, and implemented through time, making "schmucks" of us all, did not come easy, and if I was in their position I would not give it up either. Would you...?

Given that it is supposed to be a competitive environment you'd be forgiven for thinking mutually inclusive price fixing was going on among mates.

Could some one write to RBNZ asking for more interest for our old aged savers please, thanks

And for the younger generation who are trying (and getting taxed) to save a deposit for an overpriced house...

May be the government can make the first 5k in interest earned on bank deposits tax free completely ?

Way back when ... in the Muldoon era .. and before ... the first $200 of interest earned was tax-exempt

What would that exemption be worth today ? .... $1,000 ?

When did that change?

Very slowly and people never complained. IIRC at one point there was no tax then came tax and you could claim it back by filling out your tax return and then years later you found you couldn't claim it back at all. Perhaps if successive governments had not discouraged saving we wouldn't need Kiwisaver, oops sorry that's another tax with your money going somewhere that you have no control over.

And can someone write a letter to china and ask them to meaningfully restrict capital flows out of china in order to prevent greater property market bubbles in hong kong, Vancouver, Sydney, Melbourne and Auckland? If you wanted to economically sabotage a nation you could do what china is doing now. Im sure it not intention bubble creation now or is it?

Do the banks pay their share of tax? obviously kiwibank does being govt owned, how about the rest of them?

No, they instead sponsor yacht races.

Dr Anne Salmonds article in the Sunday Star Times is a timely reminder of the Neo-liberalism that is now heavily imbued in everything we do and say, our institutions and our blogging. It is important to be conscious of this, to check its sensibility and the sustainability of adhering to this ideology as we debate what is good for us individually, as businesses and as members of society. Not that I support the antithesis of Neo-liberalism that being communism at all. But I think as a society we are idiots to allow the banks to operate in this manner when it is such a New Zealand imperative to play by 'fair' rules which generally includes a healthy focus on social and economic equity. Because of the size and influence of these five banks, the present issue is about equitable sharing of the wealth recognising the customers patronage is central to the banks sustainability and helped build the business through choosing too bank with them. Alternatively, Joe Public Customer should step out of his apathetic trance and move to more competitive options. During the period Dec-May 16 while the OCR drops kicked in and these banks were still anywhere between 4.1-5% on two year fixed terms, HSBC were offering fixed 3.99% for 2 years.

So I forwarded a copy of this letter to my bank and what do you know, the next day I get the following reply.

Thank you for your email, I've re-assessed the pricing we can offer on your floating home loan, and at today's rate, I have obtained approval to apply a total discount of .50% off your floating rate. You are currently receiving .20% off the margin.

Thanks Dave for bringing this to my attention, you have saved me a few bucks.