By David Hargreaves
Westpac NZ Chief Executive David McLean is seeing definite signs that mortgage competition is "hotting up" between the banks as the housing market shows signs of a Spring upturn.
In New Zealand Westpac reported on Monday a cash profit of over $1 billion for the year to September (up 5%) and a statutory profit of $936 million, up 3%.
“We’ve had a strong result this year and that’s on the back of what we think has continued to be a strong economy and in what is quite a competitive market among the banks, " he said.
On the competition aspect, he said because of the commentary that has been around to the effect that there might be a little less activity in the housing market "there’s some positioning by banks now".
"...Spring tends to be a much heightened area of activity compared to winter and therefore banks gear themselves up to compete quite vigorously in that period.
“If people think that the volume might be down a little bit some lenders might be trying to keep their existing dollar value of volume the same – in other words supplying an increased share – so we see early signs of a bit more increased competition around mortgage lending, which as I say, would be quite normal for this time of the year. It is definitely hotting up."
Asked about the state of the housing market, and the Barfoot & Thompson sales figures released on Monday, Mclean said: "We have seen a bit of flattening or softening in Auckland and Canterbury. The rest of the country holding up. There’s a range of offsetting factors but overall I think one of the big ones that’s still playing up is the imbalance of supply and demand.
"The housing supply/demand factor has not changed'
“The Barfoot numbers were quite interesting, but it’s relatively early in the spring housing season when a lot of houses come on the market and there is more turnover, so, I think in another month or so we will have a much better feel on how things are going.
“I think those underlying supply/demand factors haven’t changed enormously. There’s been a bit of change around offshore buyers and so forth and perhaps a little bit more emigration to Australia but the underlying supply/demand imbalance hasn’t changed enormously and that would be the biggest driver of it in my view."
McLean confirmed that Westpac was reasonably keen to get a share of business stemming from the Government's flagship KiwiBuild policy, which aims to build 100,000 affordable homes over 10 years.
“We are quite keen on that. First home buyers, people getting into homes, is an attractive customer base for us. We’ve been involved in things like that for some time. We’ve been one of the few banks I think who has been involved in Welcome Home loans, which is a joint initiative with the Government, so KiwiBuild itself we think is a good initiative from our point of view and we’d be keen on those type of people.”
The Reserve Bank releases its latest six-monthly Financial Stability Report at the end of this month. If it is going to loosen its limits on high loan to value ratio (LVR) lending again it will likely do it then. For example last November's FSR contained details of a loosening of the policy, which was applied from January this year.
No loosening of LVRs
While many people in the market think the RBNZ will loosen the LVR limits again, McLean doubts it.
"All other things being equal, no.
"I think if there was signs of a more serious slow down I think there would be a good case for it.
“I think the Reserve Bank might be thinking that they wouldn’t do that if there was a risk of the housing market continuing to get a second wind and take off again, so I think their main philosophy at this stage would be trying to keep their powder dry.”
As well as the release of Westpac's annual results, Monday saw a big day for the banking sector generally with the release of the joint Financial Markets Authority-Reserve Bank report on conduct and culture of the banks in New Zealand.
Asked about this and whether there was anything he could say about any issues that might have been raised about Westpac, McLean said: “The report does not name any bank and it does not give any details on any bank so it is an aggregate view across the industry.
“All the banks will get, we understand, a report on ourselves in a few weeks and that will then tell us our own issues.
“So, I haven’t really got a view as Westpac.
“On behalf of the industry as chair of the Bankers’ Association we are grateful for the work the regulators have done. We are pleased they didn’t find any systemic widespread issues and we fully accept the call they’ve made that we’ve got to get on, improve our processes and governance and standards and put in place the sort of rigour around the thing to make sure we don’t have those kinds of issues in the future."
'Heavy focus' on customers
In terms of Westpac's focus in the past year, McLean says they've focused "very heavily" on trying to improve the experience for their customers.
"It’s still a pretty good time to be a bank customer. Interest rates are low – as I said there’s strong competition and it’s hotting up again in the mortgage market and fees are dropping.
“We’ve reduced 24 fees and charges over the last two years – taking out about $36 million out of our P&L [profit and loss account] because we are anxious to make sure that the customers are getting value for what they are paying for."
Asked if he saw more scope for further reduction in fees, McLean said: “Yeah I think so.
"We’ve done that pro-actively and we are continuing to look at things and the [conduct and culture] report out today will focus us even harder on that. So, I think there is still scope for looking at what value the customer’s getting
“…And the other thing is that as we deliver more services to customers in a more efficient way through doing it online or instantly on the mobile phone or whatever that also forces us to look at what we are charging for that."
Asked whether he sees scope for further trimming of interest rates, McLean said it was very hard to pick.
"We are sort of bouncing around at the bottom of that cycle. There are some inflationary signs but a lot of that is imported oil prices, which I think the Reserve Bank will look through.
“…But a lot of it does depend on how if the economy is softening, how fast is it softening. Our economists are telling us they still think there’s a chance of a cut [to the Official Cash Rate] – but I would say my personal view is we will stay at these rates for quite a long time."
'Business has to cope...'
Since the Coalition Government came to power late last year, business confidence as measured by surveys has been falling and is now at low levels.
McLean has previously commented that businesses need to accept that the Government did change and to get on with things.
“My thoughts are that business has to cope with all sorts of things.
"Businesses in New Zealand are pretty good at coping with tremendous variability. Changing Governments is yet another factor. My view is that businesses are good at getting on with it and planning for these things.
"Most of the people we talk to in our customer base are saying they are getting on with it and working out what the change in Government means for them and making their plans accordingly. So, I think the biggest thing that causes problems for businesses is when you don’t exactly know what policy changes are coming down the track, so, I think as the Government’s agenda just keeps getting progressed that uncertainty will reduce."
He conceded there is a risk that low business confidence could lead to a self-fulfilling prophesy of a slowdown in economic activity.
“Well, I think there’s a risk that it does. But I think what we tend to do is look through the headline number and look at what the individual scores are saying. Look at what our own customers are saying about their own businesses and their own business intentions. Other people have done these various other ways of looking at things sort of at a more underlying level and that gives us quite a lot more confidence."
Looking ahead...
In the year ahead, McLean says from the Westpac perspective the focus is "continuing to invest in the things that deliver better outcomes for our customers".
"So, providing quality, responsible lending to our customers. Our purpose at Westpac is helping our customers financially to grow a better New Zealand and we think that’s more important than ever and that’s what really drives and motivates us.
“For the bank I think it’s moving harder and faster to work out whether the customers are getting the best outcome and if not fixing them up. We’ve seen a drop in the level of complaints – but we probably need to go harder on that.
“…For the economy I think it’s a period for businesses in general a period of consolidation by the Government, which will lead to gradual reduction in uncertainty around policy direction, which will I think give businesses more confidence to invest. So, we see that middle year of the Government’s electoral cycle as one where generally things consolidate and sort of settle down a bit and I think businesses would welcome that reduction in uncertainty."
*This article was first published in our email for paying subscribers early on Tuesday morning. See here for more details and how to subscribe.
32 Comments
It's a nasty situation we've got ourselves into, isn't it?
It's a question of 'what is the least worst option?' and regardless of what the cost of funds is overseas, a lower cost of debt servicing here is the 'best' alternative.
Will it mean a lower dollar and higher imported costs? Probably.
Will it mean less credit provided by lenders, as they baulk at paying higher offshore rates? More than likely.
Will the RBNZ cut the OCR? It should.
Will capital fly out of the country, and in which case, whose capital? Certainly not 'ours'! We don't have much....
Frankly, we don't want it to implode either.
Tens of thousands of New Zealanders will suffer unimaginable hardship if the bubbles that we can all see are left to their own devices.
It's easy to say, "Well they deserve it!" but most of them don't. They did what WE encouraged them to do by electing successive Governments that did not have the courage of their convictions. National, under John Key, could and should have done better. Labour, under Jacinda Ardern, looks like failing just as badly.
Monetary policy ( lower interest rates, in other words) is all that is left to 'defend' otherwise honest and decent New Zealanders from destitution ( and yes, it will be that in an extreme case).
We shouldn't be here, but we are.
It's something we have to deal with, and hopefully, we will.
We (the global economy) tried kicking the can down the road, and this is where it got us. Time to try something different. And yes, some are going to suffer either way, helping the debt stackers and punishing the workers by lowering the cost of credit is not the best option.
To be FAIR to John Key he did face a world GFC & a major earthquake in the countries 2nd largest city
I don’t totally blame him for being slack with foreign speculation in NZ housing because he knew it kept the kiwi dollar in demand & brought in foreign currency at a time NZ was on its knees
I just wish they’d been a clear strategy with concise policies
However if your country is in trouble it’s a person like John Key who you want leading it
Minus the hair stroking of course
Because % rates are indicative of the future price of assets. Higher interest rate = higher expected asset prices etc.
Debt is Fixed; the underlying collateral ( property in this case) is Variable. Lower % rates indicate the future price of property will be lower than today if % rates fall. (NB: % rates have several components; risk premium being one, and if that is all that is left in an interest rate, the expected asset price appreciation is gone or negative)
So the servicing cost of a mortgage will be 'good' for a mortgage holder, but the underlying asset - the property; will fall in price.
The 'bad' bit will be the deterioration of the difference between' what is owed, and what can be realised at sale'.
Thanks for your reply BW.
I am stunned by your statement:
"Higher interest rate = higher expected asset prices"
Surely it is exactly the opposite, for example, the reason why asset (property) prices have risen so strongly since the GFC is because interest rates have gone down (not up)?
Wow, what a simple world you exist in. The classic (historic) reply would be that the RB puts up the OCR because they expect asset prices to go higher, (all else being equal), ie to fight inflation. As with many other things of course the calculation is often a number of factors even contradictory to each other put together but all we see is a NET effect.
Thank you, I find "simple" beautiful. You say
"the RB puts up the OCR because they expect asset prices to go higher"
I agree with you, that means that they rise interest rates to STOP asset prices from rising but BW says higher rates lead to higher asset prices, which is the opposite.
bw,
I am as bewildered as Yvil by your assertion that higher interest rates = higher expected asset prices. I have never seen any economist/financial commentator make that case. Apart from you,everyone else believes that sharply reduced interest rate have fuelled an asset 'bubble',particularly in the housing market and there are considerable fears that higher rates could lead to a severe downturn in asset prices.
However,i would love to see the evidence you have no doubt gathered to support your view.I fear I may have to wait some time,
'banks gear themselves up to compete quite vigorously in that period.'
Strong competition, fierce competition, cut-throat competition between the banks!
The Bank that Almost Broke Britain.
More 'Bail In' Shocks - Laws are unclear and Murky (DFA Australia)
It's happened in Europe and other places so we are stupid if we let it happen here too. It works like this: the bubble is burst, banks need to keep up with their shareholders and continue giving mortgages away to increase their profits, because of that interest rates go down and they give more money to more people they should not, competition increases and it just gets worse and worse, soon you have a banking system in deep s*it due to its own greed.
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