Recent fixed-term mortgage rate cuts evidence banks' are well funded and 'reasonably comfortable' with funding cost pressure, RBNZ says

By Gareth Vaughan

The Reserve Bank says the recent spate of fixed-term mortgage interest rate cuts is evidence banks are well funded and "reasonably comfortable" with funding cost pressures.

In its June Monetary Policy Statement, released yesterday, the Reserve Bank says New Zealand banks remain well funded with deposit growth continuing to outstrip lending growth, thereby reducing banks' needs to borrow long-term money in overseas markets.

"New Zealand banks took advantage of the better funding markets earlier this year and were able to issue a significant amount of long-term debt," the Reserve Bank says.

"The Reserve Bank estimates that since the start of the year the largest four banks (ANZ, ASB, BNZ and Westpac) issued nearly NZ$3 billion of covered bonds and close to NZ$2 billion of senior unsecured bonds. Issuance has fallen significantly since the March (MPS) Statement, likely reflecting that banks are well ahead on their funding programmes."

"Growth in domestic deposits has remained strong and at the same time credit growth has been weak."

Deposit growth well ahead of lending growth

Based on the banks' most recent General Disclosure Statements, for the March quarter, the big four banks grew deposits by almost NZ$2.9 billion, well in excess of their NZ$1.65 billion of lending growth. Adding in Kiwibank, the five grew deposits by NZ$2.66 billion and lending by just under NZ$1.9 billion.

Although the big five banks' deposit growth easily topped March quarter lending growth, the gap between the two narrowed from the December quarter when deposit growth, at NZ$5.3 billion, was more than five times the NZ$992 million lending growth.

Meanwhile, the Reserve Bank notes cuts to banks' advertised fixed-term mortgage rates, triggered by falling wholesale interest rates, have been accentuated by increased publicity around the ease of negotiating rates below the advertised ones.

"Many new borrowers have been able to achieve rates in the order of 5% to 5.25%, which is substantially below the current weighted average mortgage rate of 6%. Rate reductions add further evidence that banks are well funded and are reasonably comfortable with funding cost pressures at this point," the Reserve Bank says.

Between April 20 and June 1 the average bank mortgage interest rate was cut by between 22 and 39 basis points across one to five-year advertised fixed-term mortgage rates. However, the average advertised interest rates paid by the banks on minimum deposits of NZ$10,000 was also cut, by between eight and 21 basis points over one to five-year terms.

"Overall, New Zealand banks remain well funded and deposit growth continues to outstrip credit growth, reducing the requirement to raise long-term debt in overseas markets, " says the Reserve Bank.

Nonetheless, the weighted average cost this year to banks when they are borrowing long-term in the wholesale markets, has been about 200 basis points over the benchmark 90-day bank bill rate, which remains "well above" historical averages.

"Average funding costs can be expected to rise a little further as cheap long-term debt rolls off and is replaced with higher cost funding, but this is not significant," the Reserve Bank adds.

Between them the big five banks were sitting on NZ$44.7 billion of liquid assets at March 31, up NZ$1.2 billion from December 31. Liquid assets include the likes of cash, treasury bills, government securities, residential mortgage backed securities, bank bonds, and call deposits with the Reserve Bank. The idea is that this stock pile comprises either cash, or stuff that can quickly be converted into cash, should the banks need money in a hurry.

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