Big five banks offshore borrowing down just 1% after initial Core Funding Ratio introduction

By Gareth Vaughan

Despite the Reserve Bank's move to try and force banks to secure more of their funding from domestic sources and less from offshore, the country's big five banks saw their overseas funding fall by just 1% during 2010 to 34%, says KPMG.

In its Financial Institutions Performance Survey review of 2010, out today, KPMG says the mere 1% drop comes despite a term deposit war between the banks and the Reserve Bank's introduction, on April 1 last year, of a Core Funding Ratio (CFR).

The CFR sets out that banks must secure 65% of their funding from retail deposits and wholesale sources such as bonds with maturities of more than one year. The central bank plans to lift the CFR, which is designed to reduce New Zealand banks reliance on short-term offshore wholesale funding "or hot money," to 70% this July and 75% in July 2012.

All the banks say they are comfortably meeting the CFR so far as lending growth remains weak. They are also continuing to offer term deposit rates in excess of the Official Cash Rate, which currently stands at 2.5%. See all term deposit rates for 1 to 9 months here.

KPMG says of the big five banks - ANZ, ASB, BNZ, Kiwibank and Westpac - ASB still has the largest portion of offshore funding at 46%, down 1% from a year earlier. Kiwibank, which set up a European commercial paper programme late last year and has tapped it for hundreds of millions of dollars in short-term funding, continues to have the lowest reliance on overseas funding of the big five at just 5%, although this is up from 2% in 2009.

Across key funding categories - customer deposits, balances with other banks, money market deposits, debt securities, balances, related party and unsubordinated debt, the overall level of bank funding rose 2% year-on-year, KPMG says. Growth in customer deposits was the dominant feature, rising NZ$10 billion or by 5%.

Wave of new regulation comes at a cost to the banks

John Kensington, KPMG's acting head of financial services, told interest.co.nz in a Double Shot interview a "healthy tension" had developed between the banks and their regulator, the Reserve Bank, over a growing list of new regulation and resulting compliance costs.

During 2010 this included the introduction of the financial advisors regime, new liquidity requirements and anti-money laundering legislation. And still working its way through the system are the Basel III international regulatory requirements, the Reserve Bank's open bank resolution requirements, a capital overlay for rural lending and the impact of the new Financial Markets Authority, which banks will probably help fund through levies.

KPMG says banks estimate that anecdotally about one third of their information technology (IT) spend goes on compliance and this is viewed as "impeding industry efforts to innovate and create new products for customers."

Kensington says his impression is that most banks, post the GFC, believe additional regulation is needed but feel there's a lot coming at once when they're also dealing with the back end of the GFC.

"I think there’s a healthy tension at the moment between the banks and the regulator," says Kensington.

"The banks' view is they do have to make a profit to give a return to their shareholder and they also have to be able to innovate to be able to make new products for their customers. Particularly as we are hopefully at the end of the recession and we’re going into a new cycle where things are on the up, they’ll want to innovate and make new products. What they’re saying is 'this regulation is good in a sense but it’s all coming at once'."

"The regulator’s view is 'well, we had a global financial crisis and we need to do things now to make sure our economy is in good stead should we have any further downturn, whether in the immediate or near future'."

ANZ, ASB buck trend of falling net interest margins

Overall net interest margins across the country's registered banks fell to 2.12% in 2010 from 2.21% the previous year and to 2.09% from 2.19% at the big five.  Kiwibank recorded the biggest fall, down 69 basis points to 1.19%. Westpac fell 15 basis points to 2.22%, and BNZ dropped 19 basis points to 2.07%. Heading the other way was ANZ, the country's biggest bank, up 9 basis points to 2.43% and ASB rising 4 basis points to 1.68%.

KPMG said the overall drop reflected stiff competition for deposits offset to some degree by the banks raising interest rates on business and corporate loans and the benefits from customers coming off fixed-term mortgages and moving to floating mortgages.

Kensington says net interest margins were flat overall because the banks lending books weren't growing.

 "Obviously if a bank wants to grow its net interest margins it needs to either grow the size of its book or improve its margin. The banks lending has been very flat in this period. (So) they haven’t been able to improve their margin, in fact it has been decreased because of the pressure for funding," says Kensington.

The banks did, however, manage a strong increase in return on equity to 13.3% from just 1.5% in 2009 when they coughed up to settle structured finance transaction cases with the Inland Revenue Department.  But even the 13.3% is still well below the 17% to 22% achieved from 2005 to 2008.

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