Back in July, I wrote an open letter to the bank CEOs highlightling the extent of their margin grab from floating-rate mortgage borrowers.
I followed that up, pointing out that it is not principally home owners who are funding this margin grab. Rather it is small business and farmers who borrow based on the floating rate benchmarks
The margin grab continues - albiet with a sanitising term deposit salve - and we can now extend and update our tally of how much the banks have withheld.
The current round of retentions involves the largest grab we have seen so far. In March they held on to 11 bps of the OCR cut. This time they have held on to 15 bps of the 25 bps cut. (These averages would be higher if we did not include Kiwibank.)
These grabs are cumulative and they are mounting up, as the table below shows.
Finance Minister Bill English is on record calling for the policy reductions to be passed on through to borrowers via market competition (although he got badly off track batting back opposition calls for the same thing).
Prime Minister John Key has made similar calls.
And the governor of the Reserve Bank, Graeme Wheeler, this week said the banks should pass on most of it to borrowers.
These calls by public officials are being ignored by bank CEOs.
The current series of rate cuts started with a -25 bps OCR reduction on June 15, 2015 when it was reduced from 3.50% to 3.25%.
There have been five more similar cuts since then with banks passing on the full -25 bps reduction to their clients for the first three of them.
Here is the track record so far:
| The track record ... | 1-Dec-15 | 10-Dec-15 | 28-Jan-16 | 10-Mar-16 | 28-Apr 16 | 9-Jun-16 | 18-Jul-16 | 11-Aug-16 | Total over period |
| % | % | % | % | % | % | % | % | ||
| RBNZ OCR | 2.75 | 2.50 | 2.50 | 2.25 | 2.25 | 2.25 | 2.25 | 2.00 | |
| - change bps | -25 | -25 | -25 | -75 | |||||
| ANZ | 5.99 | 5.74 | 5.74 | 5.64 | 5.64 | 5.64 | 5.64 | 5.59 | -40 |
| ASB | 6.00 | 5.75 | 5.75 | 5.55 | 5.55 | 5.55 | 5.65 | 5.55 | -45 |
| BNZ | 5.89 | 5.79 | 5.79 | 5.69 | 5.69 | 5.69 | 5.69 | 5.64 | -25 |
| Kiwibank | 5.90 | 5.65 | 5.65 | 5.45 | 5.45 | 5.45 | 5.45 | 5.25 | -65 |
| Westpac | 6.00 | 5.85 | 5.85 | 5.75 | 5.75 | 5.75 | 5.75 | 5.65 | -35 |
| - avg change bps | -20 | -14 | +2 | -10 | -42 | ||||
| shaded cells | show margin grab | ||||||||
| 90 day bill rate | 2.85 | 2.75 | 2.70 | 2.38 | 2.39 | 2.41 | 2.37 | 2.23 | |
| - change bps | -10 | -5 | -32 | +1 | +2 | -4 | -14 | -62 | |
| CDS Aust IG | 125.6 | 125.5 | 143.6 | 144.5 | 115.5 | 109.2 | 95.6 | 90.2 | |
| - change bps | -0 | +18 | +1 | -29 | -6 | -14 | -5 | -35 | |
| For savers: | |||||||||
| 6 m term deposit | 3.36 | 3.33 | 3.31 | 3.23 | 3.15 | 3.12 | 3.18 | 3.20 | -16 |
| 1 yr term deposit | 3.51 | 3.49 | 3.43 | 3.41 | 3.25 | 3.25 | 3.24 | 3.31 | -20 |
| - avg change bps | -2.5 | -4 | -5 | -12 | -1.5 | +2.5 | +4 | -18 | |
Kiwibank stands out as having only withheld -10 bps from its customers over this period. At the other end of the scale, BNZ stands out as having retained -50 bps or two thirds of the OCR rate cuts.
All bank CEOs claim their margins are under pressure. But the public evidence does not support the claim.
No bank, or their industry lobby group, has revealed any data yet to support the "under pressure" claim.
What we see in the public record does not support the claim. The 90 day bank bill rate has fallen by -62 bps, and the risk premium (as measured by CDS spreads) has fallen by -35 bps. These reductions add together.
Personally, I don't buy the recent tactic of offering higher terms deposit rates for selected terms as anywhere near rebalancing the ledger. It is only a PR strategy. They are borrowing this tactic from their Aussie parents and the evidence across the ditch is that the 'benefit' will be very short-lived.
Revealingly, equity analysts who follow banks for stock market reviews applaud the bank actions as enhancing margins.
And no bank is reporting significantly lower profit. In fact one is still reporting a long-running stream of record profits.
Without the banks providing concrete evidence, the "margins under pressure" claim has little credibility.
There are victims here; small business and farmers.
It seems a simple case of a dominant oligopoly imposing its pricing power on its customers (without fear of any official or public body acting to restrain them). By their actions, it appears the four largest banks are acting in concert and pulling their floating rates into a very tight band.
At the start of this margin-grab cycle, there was an 11 bps range between the four biggest banks. Now that has almost halved to a range of only 6 bps.
There seems a clear case for a public inquiry into how banks are behaving in this matter and to construct a system where oligopoly power is restrained. Clearly market forces are not working. There is no sense of any healthy competition in pricing for floating rate mortgage-based lending.
Bank pricing actions give the unsettling impression of growing collusion, even if it does not involve direct communications and secret meetings. The RBNZ OCR cuts seems to have given them the cover to pull this off.
48 Comments
At least the banks are being prudent and building up their balance sheets. As was said in the press conference the other day the RBNZ in normal circumstances wouldn't be cutting interest rates. The only reason the cut interest rates was as a result of the mess that the rest of the world has got into.
"This week, a German cooperative savings bank in the Bavarian village of Gmund am Tegernsee -- population 5,767 -- said it’ll start charging retail customers to hold their cash. From September, for savings in excess of 100,000 euros ($111,710), the community’s Raiffeisen bank will take back 0.4 percent. That’s a direct pass through of the current level of the ECB’s negative deposit rate."
http://www.bloomberg.com/news/articles/2016-08-11/negative-rates-for-th…
Curiously Frau Merkel doesn't seem to get the big boot. Eventually they will put two and two together. Merkel has destroyed the EU by bankrupting southern Europe. There will be a price to pay.
On a related point, Merkel desperately needs to agree a deal with Russia and is quite happy to partition Ukraine so they can get back to selling Volkswagens to the Ruskies. Otherwise what are all the workers going to do?
Germany is entering a period of extreme instability and I'm not sure they have the institutional strength to cope with it.
David, the world is in turmoil with QE and negative rates. We are reliant on sound banks to fund NZ inc. We also know there are substantial sources of risk - houses and dairy farms. Risk margins and liquidity premiums continue to increase, and poor risk won't be funded. Your tirades demonstrate a lack of understanding.
If you think it's so good for banks, three words - "buy bank shares". You may notice bank share values are only now beginning to recover, because of concerns about the above. NZ banks needed to shore up profits, good on them.
Great post. Although the rest of the world is in a mess we must make sure we don't get into the same situation. We have to live with a higher exchange rate for now as our economy is in great shape in comparison to other countries where Govt spending has spiralled out of control.
There seems a clear case for a public inquiry into how banks are behaving in this matter and to construct a system where oligopoly power is restrained. Clearly market forces are not working.
When was it ever the case?
But how about asset price inflation and Bubbles? Well, there is a powerful proclivity for letting asset prices run. An inflationary bias in asset markets certainly “makes it more profitable to speculate than to produce.” And the larger the speculative Bubble the more powerful the constituencies that arise to demand government involvement, intervention and manipulation to sustain Bubble Dynamics. Misguided policymakers will endorse destabilizing asset inflation as confirmation of sound policies (Greenspan, Bernanke, Draghi, Kuroda…). In one of financial history’s most misconceived policy blunders, central bankers specifically targeted asset inflation as the primary mechanism for system reflation. Read more
Is it not a case of banks protecting themselves from the instability created by their former actions in concert with the government? And to be fair the real losers, if the truth were to be told, are the OBR underwriters of very possible financial instability, those with outstanding unsecured and under rewarded claims on banks - depositors.
Banks are very focused on meeting capital adequacy set by regulators, and would probably very happily forego paying a dividend, if that better supported share value . The reality is that investors want dividends. The point is, MikeM and David, you are the banks, to the extent you are shareholders through whatever investments you have. You are promoting some sort of regulatory silver bullet, to reduce banking system risk and at the same time maintain margins between cost of funds and lending rates set at a time when risks wer lower. Fundamentally you are trying to have it both ways, but don't know It.
"Capital adequacy as set by regulation" is actually the problem. All banks meet the regulation, most handily. But that is not making them safer in any way.
Let's look at it a different way. If I approached a bank wanting to borrow to buy a home worth $872,600 and could offer a deposit of $56,900, I would likely be turned down because my financials weren't strong enough for them. I certainly would be rejected if I told them my gross income was $21,500 per year. This is just not a bankable situation. No bank would accept the risks, even in a fast-rising house-value market.
The problem with this scenario is that this is exactly how the Aussie banks' financials work out. I looked at all four of their latest annual results today at Group (AU) level, and the above are the average numbers for them. All you need do is change the numbers to AU$ billions.
Yes, excessive leverage is the issue. By some retail borrowers, but especially by all banks. Forget "capital adequacy" - that is gamed by the banks. Look at overall leverage if you want to see where the real risk is.
There is a case for government intervention, because they are anyway going to bail out the TBTF banks again when it is required. All these banks have to make strong/higher profits, have to shore up their capital are all yesteryear thinking. The world has changed and moved on after the GFC. Now there is an implicit guarantee in all the western countries not to let the TBTF banks go under. In the meantime, it is happy times for bank owners and shareholders, enjoy.
"there is an implicit guarantee in all the western countries not to let the TBTF banks go under" but unfortunately the explicit RBNZ guarantee for the banks is for the bank's domestic depositors to absorb all the risk via the OBR. This enforced haircut for NZ depositors is unique in the western world,.
You may be misrepresenting OBR
http://rbnz.govt.nz/~/media/ReserveBank/Files/regulation-and-supervisio…
Shareholders and non subordinated debt holders lose out first. The 'freeze' on a % of depositor funds just allows the banks to reopen the next day other wise no-one would be ably to get ANY of their money out the next day at all.
Thanks for the link. That is the first clear description of OBR that I have seen. What it fails to tell us is who owns the bank after an OBR (the Govt I presume), what happens to the proceeds when the Govt sells it and most importantly what measures are in place to stop the Govt selling it to their mates at a very undervalued price as they did with the Rural Bank.
From RBNZ site: http://www.rbnz.govt.nz/faqs/open-bank-resolution-policy-faqs
What happens to the bank after the OBR has been carried out?
One of the key features of the OBR policy is that creditors are able to access the majority of their funds immediately after the bank fails and is placed in statutory management. This means that depositors and small businesses have on-going access to banking facilities, mitigating the risk that urgent liquidity concerns dictate how losses are allocated between shareholders, creditors and perhaps government.
The OBR is therefore not designed to determine how the bank failure should be resolved in the long term, but to create time for a full analysis of the appropriate course of action to be determined. In practice, the OBR is consistent with a range of long-term solutions, including sale to new owners, restructuring to become a stand-alone bank, repurchase by a parent group, government recapitalisation or liquidation.
Seems reasonable, given alternatives (alt #1 - bank fails, everyone loses all their deposits; alt#2 - full gov bail out, not good for taxpayers; alt#3 - full deposit backing by govt = premium charged, and there's usually a cap anyway. Premium charged is always passed to customers)
There is nothing there that gives any confidence that anybody will fight hard for the depositors to get their confiscated deposits back. Even at this point they are talking about the parent being able to repurchase the bank back. The potential for smoke and mirror deals at the expense of the depositors is unlimited. The depositors are the only party with any moral claim to the banks equity in this case and they alone should have final say on what happens and lay full claim to the bank assets up to the value of their deposits after repayment of any injection from the government. The original owners should be at the bottom of the list as with any bankruptcy.
Once again I am reminded of the Rural Bank fiasco -
A young Auditor refused to sign off the RB's accounts because she believed that the bad debt provisions were far too high. (87 crash and removal of SMPs). Somebody else eventually signed them after all the public bullying failed to change her mind.
Soon after it was sold to Fletcher for a song because it was argued that the bad dept provisions made it virtually worthless.
A few years later they on sold it to one of the Aussie banks for quite a few hundred million.
The OBR process is very open to just this sort of abuse and infact appears to have been set up with this in mind.
DC, I think the other issue is banks already give such large discounts, e.g. its not uncommon for a bank to give you a 1% discount hence most floaters are in the 4% range but in the advertised rates it looks like 5%...also banks know that many borrowers can not leave their current bank as 40% LVR means they are over levered and stuck...plus most are on fixed rates.
The issue here isn't the costs for homeowners, it is for SMEs and farmers who borrow based on the floating rate benchmark, usually using revolving credit facilities (secured by property) for their business.
Most homeowners are on fixed rates. And, yes, you can get below card rates in a competitive environment if your financials are strong enough.
But that is not the case for SMEs and farmers. They are price takers. The rate for them is a base, sometimes plus a risk margin as well.
DC - the comments in your article refer to Housing floating rates. Is there any comparison on Rural floating rates? Are you sure they and SME are based on the same and cannot fix? What % of bank b/s are non housing assets?
Given interest.co.nz articles always say "to negotiate rates and no one should pay carded", is comparing carded rates valid?
IMO the real challenge to SME and enterprise in general is that due to housing bubble created by cheap credit, no one wants to invest in 'real' assets and grow wealth 'properly' via business growth as opposed to selling their overvalued house to the next person.
Then again, if a business tries to improve margins and ROE for investors, they might get slammed in this sort of article. Even though the yields in banking shares are lower than yields for property speculators.
The banks show they can extract extortionate profits. Lets kill the cartel and break them up.
In the meantime bank shares are ridiculously overvalued. Time for a dividend pause, that would bring the shares back to a proper value and provide some relief for the capital reserve problem.
In the interests of clarity, define "extortionate profits". Is it based on absolute number or %? Shouldnt it relate to capital? After all, if someone invests $100k, they would be over the moon with a return of $50k, but if the someone invested $1m, they would be guttd with $50k, so it's relative to capital/investment size right? The banks dont appear to have extortionate ROEs. This of course is said with an investor hat on! With a customer hat on it's 'extotionate' :) Just like telcos, shops, .... well, everyone. Because every customer wants everything cheaper. Ironically, this makes the CPI stay down and leads to central bank madness globally {mind blown}
This is why they use the profit as a dollar value in headlines rather than as a percentage. It is also why they show profit increases as a percentage, particularly if last year was bad. It makes for far better headlines.
Good headlines don't let the facts get in the way.
If a million people invest $100 and make $15 each then that is fine. If 1 person invests $100m and makes $10m then that is extortionate unless it was you and then it is fair and reasonable.
KH - I'd welcome you to answer MisterB's question about your "extortionate profits' term (or anyone else for that matter). Its stated often here without anyone being actually seemingly able to explain why ? Are you another one of them i.e. its a popularist comment therefore it must be correct?
MisterBank a quick Google sorts out that discussion
http://i.stuff.co.nz/business/industries/69798890/australias-big-four-b…
Australias big 4 are the most profitable in the developed world ....
Little wonder when the regulators allow them free rein .
Per the article
The big four had the highest return on assets when compared with major banks from 10 other wealthy economies and some emerging markets, new figures from the Bank for International Settlements (BIS) show.
Perhaps, when compared to other banks, sure,but when compared to other industries and other NZX/ASX listed companies, not outliers really.
NB: if you read that whole article you quoted:
"Australian banks' average net interest margins – a measure of bank funding costs compared with what they are charging for loans – fell to 1.75 per cent, the report said. This was lower than all of the emerging markets banks and the US and Spain."
So NIM down... and
"The local banks' business mix is also heavily skewed towards retail banking, rather than overseas banks investment banking businesses that have become far less profitable since the global financial crisis"
So there's some devil in the detail.
When compared to other industries ?
You need to compare like for like..... can't just make camparisons with other industries to suit your message....
Of course investment banking is less profitable however the big 4 are not doing much investment banking in NZ or ever have.
Compared to emerging markets ... again higher risk so expect higher returns ...Spain lol.... seriously would you loan money there ?
The devil is in the detail....and understanding the detail which is the key point MisterBank
Banks in nz and Australia are the most profitable in the developed world
Making record profits and should be reined in. Bring in loan to income ratios on investors 4.5 to 1. Increase bank capital requirements on all residential. Stamp duty 15% on foreigners and investors not buying new builds.
Drop the sob stories about the banks having a hard time. No one believe it.
1. The B in MisterB doesnt stand for Bank
2. You say compare like for like then you compare geographic markets that aren't alike
3. Banks in NZ and Aus are not the most profitable in the developed world (refer to 2015 report) ... they were more profitable than other aggregated bank stats from other countries - and these banks included low margin big dollar investment banks, as opposed to retail mortgage banks like NZ/AU
4. The profits are pre tax too, there can be large variance in cash NPAT (the figure that matters to investors)
5. The profits are not NIM driven (which is your argument about margin grab) they are loan loss impairment driven (BIS report shows this)
6. If you increase bank capital requirements, you understand this requires more margin, right?
7. There were no sob stories, just asking for some clarity on defining such emotive words as 'extortionate'. It's with an investor hat on.
You can see why savers are moving their money out of the bank in into buying property. I was at an open home today in the Wellington region and it was full of people who were looking for a rental, and discussing with the agent what types of rents were possible. The property was a townhouse and quite expensive, so not a typical rental, and had never been used for that purpose. But these low interest rates does seem to be turning more people into landlords. This makes it even harder for first home buyers.
If they want to increase inflation, why not rise the OCR, because that will force people to put their prices up.
Very right David. Thanks for bringing out the blatancy of profit retention at the cost of small businesses and the first home buyer.
A case in point is the $908m annual profit recorded by a leading bank.
Kudos to KIWIBank on passing on most of the OCR reduction benefits to the borrowers.
The problem is, that is their carded rates. What people actually pay is often different. They may increase discounts rather than lower their carded rate. It gives them a way of targeting good customers. My experience has been that Kiwibank don't discount as much as the others. A low carded rate doesn't mean lower rates actually being paid. ASB just extended my 0.50% off floating discount for another 2 years. I never got anything off floating when I was with Kiwibank.
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