The Reserve Bank says banks cutting fixed-term mortgage rates suggests they have comfort around funding cost pressures

By Gareth Vaughan

Moves by banks to cut fixed-term mortgage rates since December suggests they have some comfort around funding cost pressures, the Reserve Bank says.

The central bank made these comments in yesterday's Monetary Policy Statement (MPS).

Although much was made late in 2011 and early this year about rising bank funding costs, especially through international wholesale markets due to the European Sovereign Debt Crisis, so far this has had minimal impact on the major New Zealand banks.

Asked about bank funding costs at yesterday's press conference Reserve Bank Governor Alan Bollard deferred to Jason Wong, head of financial markets intelligence at the central bank.

Wong noted banks had been reducing fixed mortgage rates since December, despite an increase to their own cost of funds.

"This suggests some competitive pressures and that banks have some degree of comfort on funding cost pressures at this point," Wong said.

"I guess the key determinant is credit growth and deposit growth and at the moment deposit growth is running well in excess of credit growth. So the banks don't actually need to rush out and fund at these high rates. They're getting lots of money in the door and it's taking the pressure off their funding," Wong said. "So the banks can take all those deposits, fund any new credit growth, and actually pay off debt when it comes up for maturity."

The latest General Disclosure Statements from ANZ, ASB, BNZ, Westpac and Kiwibank show their combined gross lending grew by NZ$992 million in the December quarter. In contrast the five banks, combined, grew deposits by NZ$5.3 billion.

Since December 2 the average bank advertised one-year fixed-term mortgage rate has fallen 9 basis points to 5.66%, the average two-year rate has fallen 17 basis points to 5.81%, the average three-year is down 28 basis points to 6.13%, the four-year is down 29 basis points to 6.53%, and the five-year is down 28 basis points to 6.93%. The last cuts to floating, or variable, mortgage rates came in March last year after the Reserve Bank cut the Official Cash Rate by 50 basis points to its current level of 2.5%. The major banks currently advertise floating mortgage rates ranging from 5.60% to 5.75%. See all bank advertised home loan rates here.

Few overseas forays

Offshore wholesale funding forays by the big banks so far in 2012 have been rare. The BNZ raised €500 million in a three and a bit year covered bond issue secured by New Zealand residential mortgages in January. And ANZ recently raised a combined 500 million Swiss francs through two covered bond issues - a three year and a six year issue - with those bonds also secured by residential mortgages. An ANZ spokesman said the bank had raised a total of NZ$1.9 billion in offshore term funding so far this year.

"All but around NZ$75 million was via covered bonds in euro (€500 million) and Swiss Francs (CHF500m). The other NZ$75 million was unsecured senior debt in yen," the spokesman said.

Offshore funding markets had been volatile and ANZ expected them to stay that way all year, impacting both the price and availability of funding.

"ANZ has maintained a strong funding position, allowing some flexibility as to when we look to enter into markets and take opportunities as they come available," the ANZ spokesman said.

In its MPS the Reserve Bank noted the gap between the increase in deposits and that of bank loans was likely to be a key driver of bank funding costs over coming years. The favourable gap of NZ$7 billion over the year to December had reduced the need for banks to actively seek long-term wholesale funding at expensive levels.

"That raises the question of how sustainable the gap between deposit and credit growth will be. As the economy recovers, credit growth is likely to lift," the Reserve Bank said.

"Furthermore, strong income growth in the agriculture sector may have temporarily boosted deposit growth. The deposits of insurance payouts related to the Canterbury earthquakes might be a factor that will gradually subside."

Nonetheless overall, the central bank said New Zealand banks remain well funded and, although long-term wholesale funding costs have increased significantly, the long-term proportion of total funding is small.

"Trends in deposit and credit growth as well as developments in the European debt crisis will be crucial in determining the extent to which banks will need to re-price loans over the coming year or two."

Big five have a NZ$43.6 bln liquid asset stockpile

As of December 31, the big four Australian owned banks were sitting on liquid assets, the likes of cash, treasury bills, government securities, residential mortgage backed securities, bank bonds, and call deposits with the Reserve Bank, worth a combined NZ$41.489 billion. Of this Westpac had NZ$11.476 billion, ANZ NZ$12.526 billion, ASB NZ$11.641 billion, and BNZ NZ$5.846 billion. Kiwibank had liquid assets of NZ$2.145 billion as of December 31. The idea is that this stock pile comprises either cash, or assets that can quickly be converted into cash, should the banks need money in a hurry.

Meanwhile, lending growth has been anaemic at best. The latest Reserve Bank sector credit data shows agricultural debt flat in the year to January at NZ$47.525 billion, business debt up 2% to NZ$74.215 billion, housing loans up 1.2% to NZ$173.375 billion and consumer debt down 0.2% to NZ$11.785 billion.

Wong noted despite some easing of conditions in European funding markets that has seen the cost of issuing debt come down, the cost of hedging the money back into New Zealand dollars has increased.

"So some of the recent deals we've seen by banks have actually been slightly more expensive than we saw at the end of last year despite some freeing up in the markets," said Wong.

BNZ's covered bonds, due to mature in May 2015, were priced at 113 basis points over the euro midswap rate. This doesn't, however, include the cost of converting the €500 million back to New Zealand dollars. Andrew Thorburn, BNZ's CEO, told interest.co.nz all up BNZ was paying about 250 basis points above the bank bill rate for the money.

Last week ANZ NZ's chief financial officer Nick Freeman told interest.co.nz the cost of securing overseas wholesale funding for banks was up about 50 basis points year-on-year, with five-year funding costing about 210 to 220 basis points over swap rates, including the cost of converting the money into New Zealand dollars. In its MPS the Reserve Bank said in broad terms, the cost to the Australian parents of New Zealand's big banks of issuing five-year wholesale debt has increased by about 80 basis points over the past six months. It said this represents a reasonable proxy for the effective increase in marginal long term wholesale funding costs for New Zealand banks.

"Given long-term wholesale debt accounts for about 20% of banks’ total funding, this increase is likely to have added about 16 basis points to overall marginal funding costs. However, because the banks are well funded at this point, issuance at the recent higher effective marginal cost has been rather limited. Credit growth has been weaker than expected and has been far outstripped by deposit growth. These factors have alleviated the need to fund in the expensive long-term debt market," the Reserve Bank said.

Westpac and ASB yet to tap offshore markets in 2012

Westpac NZ Treasurer Jim Reardon told interest.co.nz his bank hadn't needed to raise wholesale funds overseas so far this year. Whether and when it did would depend on what lending growth Westpac gets in the second-half of the year.

"At the moment we're comfortably placed," Reardon said. "To date we've managed to fund our lending growth via deposit growth so in that respect we don't have a need to go (to overseas wholesale funding markets) at the moment."

Nonetheless, Reardon said Westpac was watchful.

"We've seen a little bit of improvement in the offshore markets but at the moment it's still a slippery slope. If the Greek (sovereign debt) situation could be resolved it would make all our lives a little bit easier."

Nigel Annett, ASB's Treasury general manager, confirmed ASB had not raised any foreign currency term funding so far this year.

"Overall market sentiment has improved significantly since the end of last year driven by recent European Central Bank actions. The ECB's Longer Term Refinancing Operations removed significant bank refinancing risk and bond supply from the financial system, which is a positive for New Zealand bond issuers," Annett said.

"However, considerable risks remain in Europe which means marginal funding costs will remain elevated relative to historical levels. ASB’s term funding requirements are relatively modest and we will look for opportunities both domestically and offshore."

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