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ANZ Chief Issues Stark Warning On Interest Rates
Mike Smith, chief executive of Australian banking major ANZ has issued a stark warning, suggesting that world’s bank will be forced to alter their business model in response to the “permanently” higher cost of banking.
Mr. Smith issued the warning whilst unveiling the latest set of ANZ results last week. ANZ’s third quarter underlying profits leapt 37 per cent.
Despite the great performance, Mr. Smith added a note of caution, saying that the costs of wholesale funding were now a permanent feature of banking a result of the global financial crisis.
“We have to face up to the fact that banks now have permanently higher costs of doing business, these include continuing pressures on wholesale funding costs and at the same time rates for deposits have never been higher compared to short-term wholesale rates. We also have to carry significant costs associated with the new international capital and liquidity requirements. The result is we simply to have think differently about our business. We need to change, we need to streamline our structures and do things in new and different ways.” he said.
Mr. Smith’s comments immediately started speculation that Australian lenders would raise their interest rates once the results of the election became clear.
ANZ’s warning followed similar comments from NAB and CBA, both of whom say that debt that have issued which is about to mature will have to be rolled over with more expensive current funding.
Analysts believe that lenders would increasingly try to shift the burden of higher funding costs on to their customers, by increasing mortgage and consumer lending rates, as well as increasing interest rates on business loans.
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War of Words Erupts Between CBA and NAB
A war of words has erupted between two of the big four lenders, with Ralph Norris chief executive of CBA, lashing out at NAB’s claims that the lender is making super profits in mortgage lending.
The banking oligopoly in Australia is normally a cozy affair, and Mr. Norris criticizing a rival is indeed surprising.
Mr. Norris said that NAB arguing that CBA was hurting the economy because it was neglecting the business sector preferring to concentrate on less risky mortgage lending was “rubbish”
“I think the real issue is that we have a bank (NAB) that has performed poorly for many years and missed out on an opportunity when the mortgage market opened up,” Mr Norris said in an exclusive interview with The Australian. “Now they’re blaming everyone but themselves.”
CBA and rival Westpac took advantage of the historic opportunity that the financial crisis presented to establish their dominance in mortgage lending.
The two lenders grew their mortgage books organically by specifically targeting the influx of first time home buyers, which was brought about by the governments fiscal stimulus.
The two lenders increased their market share through acquisition, with CBA acquiring Bankwest and Westpac swallowing St. George.
Mr. Norris’s comments suggest that the industry has now become openly hostile towards NAB, as it seeks to establish itself as a trusted community minded lender.
The war of words erupted in June, when Mark Joiner, NAB’s finance director suggested that the banking industry was earning super profits on its mortgage book.
The allegation came at a very sensitive moment, when the resource industry was under pressure by former Prime Minister Kevin Rudd’s proposal that it be charged a super profits tax, leaving other industries feeling vulnerable and wondering whether they too would be targeted with such a tax.
Mr. Joiner said that the Basel II agreement which governs banking capital adequacy, meant that the amount required to be held against a mortgage halved, meaning that the return on equity for such a loan doubled to 45 per cent.
Mr. Joiner then drew attention to CBA and Westpac and their bias towards mortgage lending, with home loans accounting for more than 60 per cent of their balance sheet, compared to less than 50 per cent for NAB.
“Australia should have a balanced economy; not a big skew to mortgage or business lending,” Mr. Joiner told The Australian.
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GE Capital Say Smaller Australian Lenders Still Find Funding Difficult
Non bank financial company GE Capital says raising finance for smaller lenders continues to remain difficult for smaller lenders when compared to the major banks.
Skander Malcolm who runs GE Capital in Australia says that because the banks have large depositor bases they were able to fund raise more effectively than smaller lenders such as GE Money.
“We’re trying to access capital markets, they are accessing capital markets as well. Certainly, it’s a lot easier for them because they have a whole lot of deposits on hand.” Mr. Malcolm told Sky Business News.
Mr. Malcolm added that the European Sovereign Debt Crisis had had an impact on the cost of funding.
“But from our perspective, we’re well funded through this year and into next (year), so we’re pretty comfortable with where we are. But for some of the organisations out there trying to raise funds, it’s not exactly a liquid market, so there are certainly challenges still out there.”
Mr. Malcolm stressed that GE Capital was not aiming to compete with the major lenders, preferring instead to maintain a specialist position.
“When we target specialist segments, particularly in the retail side but also in the commercial side, then we compete successfully. We generate returns that are anywhere between 20 and 40 per cent better than major banks, and that’s because we stick to segments that we know and understand.” he said.
During the global financial crisis GE Capital exited the home and car loan segments, because it was felt that the company would find it tough to fund those loans.
“Our funding requirements are a lot easier now, having made those decisions, We have no plans to move back into mortgage or auto.” Mr. Malcolm said.
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Half Of All Australian Households Worry About Interest Rate Rises
Nearly half of all Australian households say they worry over the threat of looming interest rate rises, but only 20 per cent say they expect to have to carry increased debt levels in the next few months.
According to the results of the latest survey by Dun & Bradstreet, which polled consumer expectations across 1,205 individuals in Australia, nearly half or 49 per cent said they believed that interest rates would rise further, and the hikes would dent their finances.
The credit reporting agency completed the survey in June, one month after the Reserve Bank of Australia (RBA) lifted the official cash rate to 4.5 per cent, its sixth rise in eight months.
Households that include dependent children will feel more financial stress, with 55 per cent of respondents who have children, saying that the impact of rate rises would negatively affect their finances, compared with 43 per cent of households that do not have children.
The survey suggested that the stress from rate hikes would only translate into additional debt for just 20 per cent of households.
According to the survey, which examined future spending in September, nearly half of all individuals polled aged under 50 planned to use credit to pay for expenses over the period, whilst only a quarter of all Australians aged over 50 said they intended to do the same.
The RBA’s credit and charge card statistics for May 2010 showed the average credit card balance reached $3,248 in May, an increase of five per cent in 12 months.
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NAB Strategy Of Low Mortgage Interest Rates Paying Off
Australian banking major National Australia Bank (NAB) embarked on a strategy this year of discounting its standard variable rate, is now starting to reap the rewards of the move, as it acquires a larger share of the home loan market.
The number of home loans underwritten by Australia’s fourth largest lender in the last four months rose at its fastest pace in the last half decade. The bank adopted an ambitious plan in 2010 to keep its standard variable rate, now 7.24 per cent, significantly below the levels of its major rivals.
The lenders mortgage book is now estimated at $144.39 billion, and is now the third largest loan portfolio amongst the big four lenders, ahead of rival ANZ and is by far the fastest growing portfolio amongst the big four.
According to data from the Australian Prudential and Regulatory Authority (APRA), NAB managed to increase its market share of the mortgage lending market by six basis points at the expense of larger rivals Westpac and CBA.
The most recent data available is from the month of May, which shows that CBA, Australia’s largest mortgage lender lost four basis points of market share, whilst Westpac’s share fell by 2 basis points.
Over the last quarter, NAB’s mortgage book grew by 14 basis points, whilst CBA’s fell by nine basis points.
NAB also managed to outpace its two larger competitors in the total number of home loans written in May and during the preceding quarter.
NAB’s volume of mortgages rose by 1.3 per cent in May and 3.5 per cent over the quarter.
Lisa Gray, NAB’s group executive responsible for personal banking attributed the robust growth figures to the lender offering the lowest standard variable rate in the market over the last year.
“We started 12 months ago to ensure that our customers received a fair exchange of value,” “For the last four months we outgrew financial system in home lending. It’s the first time we’ve had four consecutive months of growth above system since the middle of 2005.” Ms Gray told The Australian.
NAB attracted headlines in December last year when it was the only major to pass on just the RBA’s official increase of 25 basis points whilst its rivals all increased their rates by between 35 to 45 basis points.
Ms Gray hailed her bank’s low-rate strategy: “We’re seeing more home loan customers join NAB than we’ve seen in years. Our focus on providing a better deal has not only resulted in customer retention and growth; we’re also attracting a higher quality customer portfolio.”
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NAB Likely To Be First Lender To Raise Rates After Election
A research analyst with Macquarie Equities Research says he believes that Australian banking major National Australia Bank will be the first lender to raise its rates after the election.
According to The Australian, banks will likely raise their interest rates prior to the Federal election, but according to Macquarie’s Michael Wiblin, once the election is over, interest rates will be fair game.
“The sensitivity around mortgage repricing over the last six months is due to the [forthcoming] election,” Mr. Wiblin said.
Mr. Wiblin says he thinks that NAB would be the first of the four major lenders to raise its rates, because its current standard variable rate of 7.24 per cent was currently the lowest amongst the Big Four by 12 basis points
Wiblin predicted that the NAB might the first of the big four banks to lift rates because its 7.24 percent standard variable rate was the lowest of its major competitors by 12 basis points.
“We do not comment on speculation by others about interest rates. What we would do is ask people to consider our track record. NAB was the only bank not to lift its rates above the [Reserve Bank of Australia] move in December 2009.” an NAB spokeswoman was quoted by the Australian.
The Macquarie report also said that lenders felt quite justified in any decision to reprice their mortgages, in the wake of continuously rising funding costs, and expanding mortgage books.
“An ability to reprice mortgages is set to continue for at least another six weeks, given the election,” Wiblin told the Sydney Morning Herald.
“However the unintended consequences of this situation will only get worse, with no repricing and increasing funding costs.”
In June home owners were granted a break from rising mortgage payments after the RBA left interest rates on hold at 4.5 percent.
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Australian Banks Likely To Raise Rates Independent Of Central Bank Tightening
The chief operating officer of regional lender Bank of Queensland Ram Kangatharan, says that Australian banks face deteriorating funding conditions which likely cause lenders to raise interest rates independently of the central bank.
Mr. Kangatharan says that the deteriorating funding climate is adding further pressure to banks’ margins.
Australian banking major Westpac last week tapped the wholesale funding market, and issued debt with a five year tenure priced at risk premium that surprised many, suggesting that pressure in the market remains following the European sovereign default crisis.
In an interview with Dow Jones Newswires, Mr. Kangatharan said that whilst the wholesale funding market experienced some improvement, risk aversion had officially returned, and he does not expect to see an improvement in funding costs any time soon.
He added that competition for retail deposits remained especially intense, with the only growth being experienced driven exclusively by hot money chasing special deals.
“On the wholesale side, things are getting tougher, sustainable retail deposit growth is pretty tough in this environment. All of the banks are starting to feel the pinch in terms of deposit margins.” Mr. Kangatharan said.
The result of all the pressure on funding costs means that the major lenders are likely to raise interest rates outside of official hikes by the Reserve Bank of Australia.
Mr Kangatharan says that BoQ is a price taker in the mortgage market.
“As the pressure continues on the majors, they would want to move outside the RBA rates, I think what’s holding them back is election year,” Mr Kangatharan said, referring to a general election expected to be called in coming weeks.
The RBA held official rates steady at 4.50 per cent when its policy board met today.
Australian Housing Grows More Unaffordable
According to the findings of a new report, housing in Australia has gotten increasingly unaffordable over the last year, with first time buyers needing stump up 10 per more for a deposit.
The report which was released by Bankwest suggests that a couple in Australia now needs to raised $85,800 as a deposit for a median priced home, which compares with $78,100 just a year earlier.
It now takes 4.5 years for a young couple to save enough cash for a 20 per cent deposit on a new home, up from the 3.7 years the report predicted last year.
The major cities experienced and even more acute situation with buyers in the more expensive parts of Melbourne, Perth and Sydney having to spend as long as a decade saving up for deposits just to be able to enter the property market.
Saving for how that was priced in the median range requires less effort with first time buyers needing at least four years to save the $76,900 deposit.
Saving for a median-priced unit was marginally less daunting, with first-home buyers needing to find $76,900 for a deposit – a four-year task.
Bankwest Retail chief executive Vittoria Shortt said a growing army of first home buyers were being locked out as established property owners benefited.
“This is the stark reality of a strong Australian property sector,” she said.
Still, home borrowers are likely to have some relief on Tuesday.
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Australian Banks To Cease Discounting Mortgages
Australia’s Big Four banks could end the practice of discounting offered mortgage rates to their customers, as they seek to lessen the impact of higher wholesale funding costs.
The banks are hoping that ending the practice of discounting will enable them to avoid having to raise interest rates, and pass costs of to customers during an election year.
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NAB Says Customers To Benefit From Government Ban On Unfair Mortgage Exit Fees
Lenders offering the most competitive interest rates, and mortgage borrowers will be amongst those who benefit the most from the proposed Australian federal government ban on unfair mortgage exit fees, according to Australian banking major NAB.
NAB says it welcomes the proposal by the Federal government which will implement tough new laws to counteract against unfair mortgage exit fees.
The lender says that the proposals would benefit bank customers, as well as those lenders who offered their borrowers the best value and competitive interest rates.
For over a year now NAB has offered the most competitive standard variable mortgage rate of all the major lenders.
For an average $300,000 mortgage, borrowers are currently $68 a month better off with NAB then they are with most of the other major banks.
The proposal by government is good for competition and will allow those customers looking to obtain a better deal on their mortgage the ability to obtain better rates.
NAB Group CEO Cameron Clyne said:
”While we are yet to review the full detail of the new laws we are generally supportive of measures that encourage even greater competition in Australia’s home loan mortgage market. If these new laws banning unfair mortgage exit fees encourage greater competition and give Australians more power to walk down the road and find a better deal for their mortgage then that’s a great thing for all Australians. It will be good for competition, good for bank customers and good for those lenders, like NAB, who have been willing to offer the most competitive interest rates. ”
As well as offering perhaps the most competitive interest rates in Australia, NAB was also the first lender to abolish a number of other fees, as well as double the number of ATM’s its customers could access without facing charges.
