By David Chaston
Back in July, I wrote an open letter to the bank CEOs highlighting the extent of their margin grab from floating-rate mortgage borrowers.
I followed that up, pointing out that it is not principally home owners who are funding this margin grab. Rather it is small business and farmers who borrow based on the floating rate benchmarks
The margin grab continues and we can now extend and update our tally of how much the banks have withheld.
The current round of retentions involves the largest grab we have seen so far. In March they held on to 11 bps of the OCR cut. In August they held on to 15 bps of the 25 bps cut. Now, it seems, they are holding on to all 25 bps of it.
Two banks have said what they are doing, but most are hoping it won't be noticed.
|Floating||Prior rate||New rate||Change||effective from|
|%||%||%||for existing clients|
These grabs are cumulative and they are mounting up, as the table below shows.
In a year, the RBNZ has lowered the OCR by -100 bps. The money markets have repriced the 90 day bank bill rate -77 bps lower over that period.
But banks have only passed on -44 bps of this to their customers. Recall, a year ago, it was normal for them to pass on all of it.
Now they hold all of it. How the tables have turned !
Here is the track record so far:
|The track record ...||1-Dec-15||10-Dec-15||10-Mar-16||28-Apr 16||9-Jun-16||18-Jul-16||11-Aug-16||10-Nov-16||Total
|- change bps||-25||-25||-25||-25||-100|
|- avg change bps||-20||-14||+2||-10||0||-42|
|shaded cells||show margin grab|
|90 day bill rate||2.85||2.75||2.38||2.39||2.41||2.37||2.23||2.09|
|- change bps||-10||-32||+1||+2||-4||-14||-15||-77|
|CDS Aust IG||125.6||125.5||144.5||115.5||109.2||95.6||90.2||103.9|
|- change bps||-0||+1||-29||-6||-14||-5||+13||-22|
|6 m term deposit||3.36||3.33||3.23||3.15||3.12||3.18||3.20||3.24||-16|
|1 yr term deposit||3.51||3.49||3.41||3.25||3.25||3.24||3.31||3.30||-20|
|- avg change bps||-2.5||-5||-12||-1.5||+2.5||+4||-1||-19|
Now all banks are holding on to the all benefits of the OCR reduction, includng Kiwibank and the second tier banks.
And this time, there is not even a whisper of increasing the term deposit rates as a 'reason'.
More interestingly, there is now no public discussion about the issue.
The banks have won. Period.
The only thing bank customers can do is ask/plead (vigorously) for the 25 bps reduction. In the past, there has been some evidence they will respond.
OCR reductions are there to bolster bank positions. They no longer flow through to customers.
All bank CEOs claim their margins are under pressure. But the public evidence does not support the claim.
No bank, or their industry lobby group, has yet revealed any data to support the "under pressure" claim.
Even the RBNZ's own monitoring shows that bank margins are rising, and far from "under pressure".
Banks are reporting marginally lower profits, but that is more due to rising provisioning for rural lending and little to do with residential lending.
Banks have pulled back on some types of residential lending, especially where overseas income is involved, and elsewhere in line with RBNZ signals about the risks of high LVR "investor" activity. This is lowering the number of new mortgage transactions.
The irony here is that those borrowers who remain are the stronger ones, and it is they who face the higher-than-necessary floating rate costs, the very ones the RBNZ policy was not aimed at.
Even RBNZ governor Wheeler said he is comfortable with the situation.
Bankers will bridle at this review and interpretation. They will point to the higher costs of the US funding market (true), the necessity for keeping bank balance sheets strong (also true, but it should be shareholders doing that, not extracting oligopoly profits from NZ customers as the mechanism), and the idea that the RBNZ is a follower here because the interest rate and inflation outlook has changed with a rising expectation (debatable but possibly correct; but this actually won't show up until some time in 2017 and well after the next RBNZ review).
The main impact will be higher-than-necessary costs for farmers and SMEs.
The irony is that an elevated OCR keeps the base rates high - and then the banks raise their risk premiums for those farmers and SMEs. They get it twice, in some cases (this end of the market is so opaque that it is impossible to know - but we do know that overall NIMs are rising, not falling. (NIM = Net Interest Margin.) (And that judgment is from a big bank auditor.)
Banking is an unusual business. Tax-paid profits greatly exceed their total payroll. Shareholders expect higher returns without the need for additional capital. The only push-back comes from regulators, and the Aussie ones are far more aggressive in this than the RBNZ.
On November 30, we will get to hear the RBNZ's view of our banking system's financial stability. Given their track record, the banking industry will get off lightly there too.
But the extent of the banks power will next be shown when the OCR starts to rise. My bet is that our banks will pass on any increase immediately, and in full.