ANZ's Fagg says higher RBNZ funding ratio will hit customers

By Gareth Vaughan

The chief executive officer of the country’s biggest bank says the Reserve Bank’s move to increase banks' core funding ratio (CFR) will ultimately see customers paying higher interest rates. Jenny Fagg, ANZ New Zealand CEO, told interest.co.nz the bank was comfortable with the central bank’s move to lift the CFR to 75% from 65% within two years. The CFR is essentially a set of rules that force banks to raise more funding domestically from regular mum-and-dad investors and through longer-term bonds.

The Reserve Bank is lifting the ratio in the wake of the global financial crisis. It says New Zealand banks have had an unusually high proportion of their international debt securities maturing within one year compared with other developed countries.

This makes the banks more vulnerable if 'hot' international wholesale markets freeze, as they did after the Lehman Bros collapse. It has therefore set the 75% minimum core funding ratio as a “challenging but achievable” target to ensure a higher proportion of stable funding and a reduced reliance on short-term offshore funding. Fagg said ANZ was comfortable with the 75% ratio as it was already at that level. But it would lead to higher funding costs for the banks, which would flow through to customers.

“You’re seeing it now in the deposit wars and we’re going to continue to need to fund offshore.” Fagg said. “So I think the reality is having to hold high core funding like that does actually lead to an increased cost of funding, whether directly or indirectly, which means that it will flow through to margins.” Releasing his company’s annual Financial Institutions Performance Survey this week, KPMG head of financial services Godfrey Boyce said he expected the increase in the CFR would add about 50 basis points to bank funding costs.

This, Boyce suggested, would in turn be passed through to household and businesses via higher interest rates. Fagg said she supported Boyce’s premise of an increase but didn’t know what the quantum would be. Her comments came as the ANZ Group released interim results on Thursday, which included a 36% rise in net profit to A$1.93 billion. However, ANZ New Zealand, including the National Bank, ANZ, UDC and ING NZ, posted an 8% fall in profit for the six months to March to NZ$386 million versus the same period of last year.

Rural and commercial losses grow

Commercial and rural business was among ANZ’s hardest hit sectors with profit down 56% to NZ$59 million. Fagg said this sector was hard hit by provision charges for credit impairment, which at NZ$330 million across ANZ New Zealand, were up 13%. Whilst there was improvement in some segments like retail and institutional, commercial property and farming felt like they had a fair way to go yet. “It’s going to take a long time for that (commercial property) to get back to a more normal level and similarly with rural. Whilst the Fonterra payout increases are great, it’s not till we see the land sales happening that you’d have to say there’s real resilence and robustness back in the industry,” said Fagg.

The bank expects overall lending growth to bounce back from its current flat levels to 4.5% next year with house loans growing by 4.7% and business loans rising 4.3%. Fagg is also eyeing “strong growth” from non-lending business including institutional banking, insurance and KiwiSaver following ANZ's move to full ownership of ING NZ.

This was first published this morning in our Daily Banking and Finance newsletter, which is for our paying subscribers. Find out more here.