Competition by banks on rate fades

We review the OCR rate holdbacks, the third consecutive time banks have done this and their most aggressive to date. Customers just take it

27th Aug 16, 9:52am by David Chaston

By now, most banks have passed through their fraction of the August 11 RBNZ OCR cut.

Now is a good time to review the upshot.

The initial decisions by both Westpac and ANZ earlier in the year has given the industry 'permission' to hold on to some or most of the official cuts. And the growing boldness now extends to some retaining all the reduction for themselves.

Some public policy makers have said that it is "up to the market" to determine these rates.

The "market" is working on the supply side at least. Banks have held on to most of the cuts.

The pushback in the public conversation has been limited.

And there is little evidence that homeowners, or more importantly SMEs or farmers have moved banks as a consequence.

The banking industry has effectively got a free pass here.

And it is interesting to note that it is both the largest (ANZ) and smallest (Cooperative Bank, TSB Bank) that have been the most aggressive in retaining most or all of the latest reductions.

The banking industry clearly feels little threat, pressure or pushback from either regulators or consumers. Certainly there is little competitive retail rate pressures from within the industry.

As we have noted earlier, this is the third consecutive OCR change where retention has been the industry response. And this August 11 event has shown the most aggressive response by banks yet. It seems reasonable to expect an even more selfish response if the RBNZ cuts again on November 10, as many observers expect. (There is an official September 22 review in the meantime, but the RBNZ has recently signaled that it prefers a full MPS to change the OCR - which in turn makes you wonder why they have interim reviews.)

So, any market discipline of banking behaviour in this matter now seems up to borrowers. Unless they choose to change, the bank behaviour pattern is unlikely to be different.

The institution with the lowest floating rate is now Resimac, who changed its floating rate on Friday to 5.19%.

The bank with the lowest floating rate is now Kiwibank at 5.25%.

Otherwise, almost all banks now offer floating rates in the relatively tight range of 5.55% to 5.65%, with the Cooperative Bank now the only other bank outside that range.

See all banks' carded, or advertised, home loan rates here.

Floating	Prior rate	New rate	Change	effective from
	%	%	%	for existing clients

RBNZ OCR	2.25	2.00	-0.25	11 August 2016

	5.64	5.59	-0.05	29 August 2016
	5.65	5.55	-0.10	24 August 2016
	5.69	5.64	-0.05	29 August 2016
	5.45	5.25	-0.20	29 August 2016
	5.75	5.65	-0.10	31 August 2016

	5.45	5.45	-0.00	[no reduction so far]
	5.75	5.59	-0.16	17 August 2016
ICBC	5.60	5.60	-0.00	[no reduction so far]
	5.69	5.54	-0.15	18 Sept 2016
	5.54	5.54	-0.00	[no reduction so far]

Resimac	5.34	5.19	-0.15	29 August 2016

Mortgage rates

Select chart tabs

Source: interest.co.nz

Source:

We welcome your comments below. If you are not already registered, please register to comment

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

32 Comments

by Caleb | 27th Aug 16, 10:25am 1472250326

I have a Kiwibank floating mortgage on 5.1% which they have just adjusted down to 4.9%, without even asking. Would fix long term with a rate starting with a three..

by Justice | 29th Aug 16, 9:58pm 1472464716

??? It's floating so you shouldn't have to ask. A floating implies they must follow a trend or else what would be the point?

by Noncents | 27th Aug 16, 10:28am 1472250510

"Customers just take it"?

What choice do we have?
- a bank account is all but mandatory, try and achieve anything without it.
- All the banks are doing the same thing
- A Free market never results in valid competition, it results in collusion by corporates/industry to ensure the most cash is hoovered up from customers.

We could vote a different Govt in, but history has shown that none of them really care.

Change is only generally bought apart by civil unrest and direct action, short of that, what is it we "Customers" (Slaves) can do?

by Hevi Groswaite | 27th Aug 16, 11:35am 1472254500

Very true, there isn't much we can presently do!
Which is not to say there is nothing we can do. As a matter of fact if we persist on doing nothing, the yoke will become permanent!
I envision a mandatory (By law!) bank account linked to all other assets one may own, linked to a subcutaneous chip with all payable dues on direct debit accounts for easy access to our money, all controlled by satellite, with GPS enabled.

by Noncents | 27th Aug 16, 11:45am 1472255122

They already have that - it's called a smart phone and most people willingly carry it around.

by boofta | 29th Aug 16, 8:40am 1472416828

We all have a choice but to be brutally honest the significant majority are to complacent and lazy to change banks. Its a matter of attrition, and as long as there are more new customers coming in the front door, than there are leaving they will continue to do what they are doing. Customers need to talk with their feet, and walk if necessary

by Roelof | 27th Aug 16, 11:14am 1472253282

Would be interesting to also compare with changes in deposit rates..??

by Grant A | 27th Aug 16, 12:46pm 1472258797

Truth is the major trading banks assets are growing faster than retail deposits on average, and their unwanted wholesale funding is at risk of growing as a consequence (pay savers/investors less than 2% after tax then its not unexpected). That rebalancing isn't something the banks want as it accounted for much of the blow out in the margins on that funding source that put them temporarily at risk, and inflated borrower's margins, back in 2008-10. It is clear that they are no longer aggressively lending, and what lending they are doing has to meet higher hurdles in terms of profitability, otherwise they're more than happy to let another bank do it instead. However, the likes of Kiwibank doesn't have the same issue because it is still a minnow and able to fund fully off the local retail market, in which case right now if they decided to become aggressive they should be able to take some market share off the larger banks who will be happy to accept that as a price to pay whilst they continue to focus upon their funding diversity.

Just part of the cycle but unless NZ can ever fully fund itself from local retail sources (not in my life time) there will be a limit as to how fay the total borrowing rate can fall before these funding pressures exert themselves and stall the move - I suspect we're pretty close to reaching that point now.

by David Chaston | 27th Aug 16, 2:34pm 1472265242

Grant A is right, to some extent. At the top level from a banking industry point of view, the data is that "Funding" (bank liabilities to depositors) grew from $286 bln in June 2015 from local sources to $332.1 bln in June 2016, a rise of $46 bln in a year.

But they loaned an extra $55.8 bln in the same timeframe. (that is, NZ dollar "Claims" went from $362.3 to $418.1 bln in June 2016.)

So on the face of it, their funding deficit got worse by $10 bln in a year.

My point is that their Capital + Reserves only went up by $4 bln and then they paid back their "associates" by $4 bln, a net change of essentially zero.

Where are the shareholders in all this lending growth? They are leveraging up dangerously in my view. You can't just say customers should pay through higher interest rates to "build the capital" through higher profits, if the shareholders won't come to the party at all. Do these shareholders see the situation as too risky ?

Shareholders need to step up and invest in their businesses as banks. It is the same obligation a banker would place on any other business in a lending situation. Banks can't be allowed to get away with being two-faced.

From a society, regulation and responsible corporate citizen view-point, Grant A is not right however.

by Grant A | 27th Aug 16, 2:22pm 1472264551

Yes good point David, a dilemma though for many corporates I'd suggest. And should Westpac run 19 unprofitable bank branches to be a good corporate citizen ?

by KH | 29th Aug 16, 5:41am 1472406098

Yes Grant. Westpac should keep those branches open. And while they do that they can reopen some city branches as well.
I have extensive use of banks and of course almost none is over the counter. But a couple of times a year I need to front up to a counter. That's become a third world fiasco. Staff have been cut, everybody there is for something complex, queues don't move,.
I believe those branches are very profitable - but westpacjust wants to charge those customers without providing service.
We also have phone companies who don't want to talk to you on the phone

by DaveB1978 | 29th Aug 16, 10:01am 1472421672

Those phone companies are provided free music for a good 30 to 40 Mins. Give them some credit.

by Stephen Hulme | 27th Aug 16, 4:22pm 1472271735

But they loaned an extra $55.8 bln in the same timeframe. (that is, NZ dollar "Claims" went from $362.3 to $418.1 bln in June 2016.)

Which must have created an exact and equal amount of deposits (bank liabilities) to offset the banks' balance sheet assets - which by neccessity includes cross currency based swapped foreign funding/liabilities (NZD $89.358 bn) to be accounted for on both the asset and liability ledgers. Deduct them from the assets and how do the domestic funding numbers balance?

by MikeM | 27th Aug 16, 7:39pm 1472283582

Yes one does wonder why there isn't more pressure for banks to issue more common stock if they want to extend leverage. They seem quite happy to issue unsecured Cocos however.

by Stephen Hulme | 27th Aug 16, 8:50pm 1472287832

Exactly. Is APRA leaning on the parent banks to conserve capital back in Australia.

by surfisup | 27th Aug 16, 1:01pm 1472259661

When someone gets a loan from the bank, the bank just creates the money right? So, when they create this money, does the bank have to pay the OCR to the govt?

by David Chaston | 27th Aug 16, 1:27pm 1472261242

"just creates the money"

It is more than just a whim. See this.

by Stephen Hulme | 30th Aug 16, 1:44pm 1472521460

Are you kidding? This article is a description of fractional reserve banking whereby a 10% reserve ratio is set aside and money mutiplied into new bank credit/loans. Can you supply a link to a report showing where the "10% reserved cash at hand" is located, given NZ bank claims are $~418 billion and circulating fiat currency is valued at ~$5.5 billion.

Even in the US where fractional reserve banking legally functions banks sweep client money from reserved transaction accounts into non-reserved money market accounts. Hence the required reserve balances are a tiny fraction of US bank liability structures. View H3.

Might I suggest a more balanced and correct view of how matters function in New Zealand. Read more

by rp | 27th Aug 16, 1:05pm 1472259931

David to make this story accurate you have to look at deposit rates as well. I noticed some banks lifted deposit rates after the OCR cut, instead of cutting them which has happened in the past

by David Chaston | 27th Aug 16, 1:35pm 1472261734

Yes, Looked at term deposit changes here. And keeping a close eye on them in future. The Aussie experience is that they evaporate after about 2 months, leaving the mortgage gains in place, We will see how it plays out in NZ.

The telling metric is that sharemarket analysts expect this hold-back strategy to boost bank margins. They don't actually see the TD offers costing the banks much at all. And I agree; they are targeted at offer terms that minimise uptake. In fact, ANZ-NZ has rolled back its 9 month one already (and 9 months is a very popular TD term).

by rp | 27th Aug 16, 1:43pm 1472262199

you are right in that TD rises don't cost as much as they are much smaller than the loan books. Glad to hear you are watching TD rates to see if rate increases are short lived. Thumbs up to you David

by imhenry | 29th Aug 16, 7:10am 1472411433

Yes but in general, they have decrease savings type interest rates. lets have no more talk about cutting the OCR.

Also lets have Insurance on term deposits. Why should the depositors be forced to take a haircut mif the Banks over expose their lending obligations. Lets not have the answer to expensive or difficult to implement. The Banks have shown us were there is a will there is a way. Why protect the Banks from an Armageddon of their own making. Its just another business decision.

by Eco Bird | 27th Aug 16, 3:32pm 1472268779

David, Good article ... I have noticed that this trend has become very common in other banks in the world and its not only us who are complaining about this phenomena ...
Is there any truth to the rumors claiming that the banks know that there are tougher times ahead and they are getting ready for it ( especially with the increased risk from housing bubbles all around the Globe , which require to be priced) ... and that the period of low interest rates might be coming to its end?
At least the FED has been signalling that and confirmed yesterday!.
the other point is that everyone ( especially banks) now is chasing returns in a world of flat bond curves and low inflation leaving the majority of returns mostly in residential and commercial mortgages .. as business lending has stagnated around the world
Your thoughts

by JetLiner | 27th Aug 16, 4:17pm 1472271440

ICBC, as representative on the list above of the Chinese banks operating here, will have their own NPL concerns, given the challenges facing the wider banking sector in mainland China (http://asia.nikkei.com/Business/Trends/Bad-debt-nightmare-far-from-over…).

Maybe squeezing out a few basis points of loan profit might be the order of the day for them in the overseas branches.

by Too clever by half | 29th Aug 16, 6:27am 1472408868

Another bank should jump in where Westpac closes branches good PR.

by imhenry | 29th Aug 16, 7:13am 1472411614

That would all it would be a PR exercise. A radical change to our Economic way of running this country is what is needed.

by Kiki San | 29th Aug 16, 6:46am 1472409996

Meanwhile, HSBC has hit the market with 3.79% for two years. Brand means nothing if you focus on the math.

by Yvil | 29th Aug 16, 1:47pm 1472435250

Good article David, what do you suggest we customers do when you state in the headline

"Customers just take it" ?

by Dave2 | 29th Aug 16, 5:52pm 1472449965

Consumers don't need to just take it. I suggest the following
- spend less than they earn - interest rates are low so its now if ever
- pay off debt
- save and take advantage of high TD rates
- buy bank shares
Sounds like good choices to me.

by Squishy | 29th Aug 16, 10:56pm 1472468165

I doubt changes to the floating rate will entice consumers between banks. Have people been flocking to Kiwibank or away from the big 4 Australian banks? Most consumers think they can beat the market by fixing instead or riding out the market cycle, most banks offer little advice and are happy to let them roll the dice. Also as I recall ASB Bank lifted their rate before the OCR and then cut so have they really passed anything forwards?

by Roger Witherspoon | 30th Aug 16, 2:43pm 1472524989

Customers just take it

Sigh. It should read:
Suppliers just take it.

Depositors are bank suppliers. Borrowers are a bank's customers. We live in a state of bank befuddledumb, where the oligarchy of banks (central and private) have a collective monopoly and license to print money and extort value from depositors.

If banks lend at a 2% reserve rate (25% of 8%) they can lend each deposit 50 times. So if they receive a 2% margin each time they make 100% return on their "reserves". It is all a big con.

by Brutus Iscariot | 30th Aug 16, 6:14pm 1472537670

Why do we think we deserve lower interest rates anyway?

Wheeler was quite clear that he cut the OCR in order to lower the currency. It was not to fuel the housing market further by dropping mortgage rates to even more ridiculous all time lows.