By Bernard Hickey
In the wake of the earthquake some bank economists have called on the Reserve Bank to cut the Official Cash Rate (OCR) to help revive an economy in crisis.
ANZ New Zealand, which owns both ANZ and National Bank, is New Zealand's biggest bank. Its economists have called for an emergency cut of up to 50 basis points to 2.5%. So has ASB's economists, who argued that inflation pressures were light and credit growth was weak. Westpac also sees a good chance of a cut on March 10 when the Reserve Bank releases its monetary policy statement, saying national confidence needs the boost. See more here from Alex Tarrant on bank economists calling for an OCR cut.
BNZ is the only bank to say a cut is not justified, saying it was a blunt instrument and other more targeted spending was needed.
The assumption, of course, is that the banks would pass on such an OCR to their customers, almost half of whom are now on floating rate mortgages and would see the benefit almost immediately.
However, there is the politically explosive risk that the banks would not pass on all of any cut in the OCR. In Australia last year the parents of these same banks added extra interest rate hikes to the one made by the Reserve Bank, sparking a political storm. It seems unthinkable that the banks would not pass on cuts in the OCR here after the earthquake.
So it's worth looking more closely at what has happened to the big banks' profit margins over the last year and how much 'fat' is in their accounts upon which to rely when deciding what to do when or if the OCR is cut.
It turns out the banks have quietly been lifting their profit margins over the last year by sitting still as the market has changed around them.
PricewaterhouseCoopers reported earlier this month that in the second half of the financial year to last September the big five banks (ASB, ANZ, BNZ, Westpac and Kiwibank) increased their net interest margin by 8 basis points on average or 9%. That doesn't sound like much, but it amounts to an extra NZ$300 million profit in six months to NZ$3.3 billion. This was largely possible because most of the banks customers are moving to floating mortgages, where profit margins are slightly higher, from fixed rate mortgages. See more here from Gareth Vaughan from the PwC report and the chances of tougher regulation to control bank profits.
This 8 basis point increase in New Zealand was actually higher than the 5 basis point increase seen for their parents in Australia over the same period.
The increase in the banks' profit margins have continued since the end of September. ANZ reported its New Zealand net interest margins rose a further 7 basis points in the December quarter. On lending of NZ$97 billion, that's an extra NZ$68 million in profit for New Zealand's largest bank inside 3 months. See more here in Gareth Vaughan's article on ANZ's net interest margin rise.
ASB reported its net interest margin rose by 40 basis points to 200 basis points in the year to December 31, again largely because of the shift from fixed to floating. Even Kiwibank reported its net interest margin rose 23 basis points to 142 basis points in the year to December 31, helping to increase net interest income by NZ$23 million. See more from Gareth Vaughan on ASB's profit growth.
To be fair to the banks, their fee incomes from transactions have fallen around NZ$165 million in the last year because of lower transaction volumes in a slower economy, but that's less than half of the increase from net interest margins.
But it's still worth asking why the banks have increased their profit margins when their customers are doing it much tougher and lending growth has stalled.
So one way for the banks to help boost the economy would be to give back the profit growth they have experienced over the last year, including Kiwibank. That might spark some activity and help stressed consumers.
A cut in their floating mortgage rates of around 10 basis points would do the trick.
6 Comments
Is the gross margin pertinant? 8 basis point on little turnover is not much in absolute terms. If lending is down, and it appears to be, then the dollar intake by the banks must be increased to cover their fixed costs? Maybe there is a case to make for increased margins, to keep the banks viable through what will be a trying time as property turnover collapses in the wake of the earthquake.
We always knew the banks margins had grown significatly after the GFC . Many people were in the middle of high fixed rate deals on mortgages, and a whole heap of people were borrowing at over 10% for moveable assts , plant machinery , office equipment and working capital requirements ( Overdrafts) . Banks made super profits at this time , while rasieing provisions for impaired loans that never really become impaired
The banks funding costs from depositors fell when the OCR went to down to 2,5% , and this "safety net" was manufacrtured by RBNZ to shield the Banks and NZ'ers with mortgages from the GFC.
Banks also have special dispensations for "impaired loans" (read Bad debts), and they are well known for creative accounting in this area , because a doubtful debt gets a "provision" and comes straight off the bottom line . Its not a real loss until crystalised , but they can charge it to the income statement , reducing the stated profit , and pay less tax
The Banks dont need these GFC related safety nets any longer. They need to be weaned off them .
In the meantime, the most effective form of "saving" is to reduce all debts , there is no incentive to save cash whatsoever
FYI, in its monthly Property Focus report out today, ANZ says this:
"Mortgage rates have not changed over the past month, but they are set to fall dramatically. Indeed, as a result of the recent Christchurch earthquake, we expect the RBNZ to cut the OCR by 0.25 percent in both March and April. Floating mortgage rates will fall one for one with the OCR, taking them back to last year’s levels.
Fixed rates are also set to fall dramatically, particularly for shorter terms like the 2 and 3 year. Indeed, wholesale interest rates have plunged (the wholesale 2 year rate has fallen 40 basis points since the quake), and continue to fall, and this will be reflected in fixed mortgage rates as soon as market rates stabilise.
Given this outlook, we see no rush to fix, and prefer to literally see how the dust settles before making a decision."
More on this topic here with Kiwibank now having over half its mortgage book on flaoting rates - http://www.interest.co.nz/news/majority-kiwibanks-mortgages-now-floatin…
Boatman - banks funding costs rose when the OCR fell to 2.50% - where did you get the opposite from. The banks were paying less than 20 basis points for their funding prior to the GLC and are now paying 100 - 150 bps depending upon the term..the nominal levels is irrelevant....most of what you said is informed so suggest you actually do some research
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.