Banks now voluntarily offering to reduce customers' interest rates in order to avoid bidding war with rivals and keep good customers

By Gareth Vaughan

Banks are striving so hard to retain good existing customers that they're now voluntarily offering to reduce their interest rates, KPMG says.

Speaking to interest.co.nz as KPMG released its annual Financial Institutions Performance Survey (FIPS), John Kensington, the firm's head of financial services, said banks were offering discounts to reduce the risk good customers would shop around for a new bank. This was happening both in the business and residential mortgage markets.

"If you have a good customer that is paying their interest and their principal as they're supposed to, and you suspect they're coming under the watchful eye of a competitor, banks are even now starting to think about voluntarily going and talking to that customer about a slight rate reduction and an extension of (loan) term to keep them on board," Kensington said, "as opposed to having the predatory competitor going in there and offer a much lower rate and ending up with a bidding war."

In the short-term this would "put some squeeze" on margins.

"But the reason the banks are doing it is if you've got a large, good customer and you lose that customer, you're going to have to replace them with someone else and you may not get the same quality or the same size," Kensington said. "You may have to do more deals and they may not be of such quality. So that's really the logic behind it. It's really competitive forces at play."

"We have heard one or two comments that the rates quoted in the window can be bettered if you're doing things at a low LVR (loan to valuation ratio) or you represent a very good credit risk. So the market is very competitive at the moment, very competitive," added Kensington.

His comments come with lending growth beginning to increase, albeit still at levels way down on the double digit growth rates seen between 2003 and 2008. According to the latest Reserve Bank sector credit data, agriculture sector debt rose 5.1% in the year to December, business debt rose 2.5%, housing debt increased 3.7%, and consumer debt was up 2.4%.

The FIPS review of 2012 analyses the performance of New Zealand banks, finance companies and savings institutions in the year from September 30, 2011. It shows bank sector net profit after tax up NZ$442 million, or 13.6%, to NZ$3.678 billion. This came against a backdrop of a more friendly funding environment for the banks, a 3.2% rise in gross loans and advances and a 9.8% increase in deposits. Net interest margins were up 3 basis points to 2.25%.

Bank bosses 'not raising their hands and cheering and clapping' new regulatory & compliance demands

Kensington said a major issue raised in his discussions with bank bosses was regulation and compliance with costs, both in terms of staff time and dollars and cents, on the rise. Some of the compliance issues financial institutions are dealing with include preparing for the incoming Anti-Money Laundering and Countering Financing of Terrorism Act, the US Foreign Account Tax Compliance Act (FATCA), the Reserve Bank's Open Bank Resolution Policy, and the Basel III capital adequacy requirements.

"What they (bank executives) are not doing is raising their hands and cheering and clapping," Kensington said.

"They don't actually see the regulation as bad and they see it good that New Zealand has it. I think what they are a bit concerned about is so much is coming at once and in many situations we're seeming to introduce it early ahead of when perhaps the parent bank's country is introducing it, which would then allow them to leverage off that and have lower costs. That's probably their number one concern."

"Their number two concern is really around 'well hang on a minute, if we really truly are at the bottom (of the economic cycle), or we've bumped along the bottom and we're going to go up in terms of economic growth, then it's time for banks to be innovative and introduce new products'."

"And they're saying at a time when we are struggling for new products, and there's a challenge for us to get resources to get these new products, it seems a little bit unusual that we're spending most of our new resource on complying with new rules. So it's that trade off between 'I have to comply and get the resource to do it', versus 'I'd really like to spend that resource on innovating and producing new products'," said Kensington.

Meanwhile, the FIPS review shows total assets up, albeit by just 1.6%, in the finance company sector for the first time since 2008. On top of this, the ratio of impaired asset expenses to average loans has fallen below 1% for the first time since 2008. KPMG says comments gleaned from finance company executives indicate the writing of business has increased. Annual profit for the finance company sector rose NZ$29.6 million, or 14.4%, to NZ$234.6 million with net interest income up 9%.

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