Banks haven't yet cut floating interest rates charged to rural borrowers following last week's Official Cash Rate cut, despite widespread talk about them doing what they can to help indebted farmers through the dairy downturn.
ANZ, Westpac, Rabobank and ASB say they’re still “reviewing” their floating rural lending rates, further to the Reserve Bank last Thursday cutting the OCR by 25 basis points to a record low of 2.25%.
Interest.co.nz is still awaiting a response from BNZ, following an inquiry on Monday morning.
While of the above banks, ANZ, ASB and Westpac have cut mortgage rates, and ANZ, BNZ and Westpac have cut savings rates since last Thursday, the banks don’t appear to be moving fast with their rural lending rates.
It is worth noting rural lending rates are a little different to personal lending/deposit rates, as banks provide different clients with different rates according to their risk profiles. Yet banks do so using a base rate, which is what we are talking about here.
Last Tuesday Fonterra cut its forecast payout for the current dairy season by 25 cents to $3.90 per kg/MS. Dairy farmers are facing three consecutive seasons of below breakeven payouts, with the Reserve Bank estimating breakeven across the sector at about $5.30 per kg/MS. According to the Reserve Bank, total dairy debt stood at $37.9 billion at June last year, representing about 10% of total bank lending.
Meanwhile, Finance Minister Bill English says the Government won't bail the struggling sector out.
Banks: We assess things on a case-by-case basis
A spokesperson for ANZ – the country’s largest dairy lender – says, “We are not announcing any immediate changes to floating rural lending rates. However, these will be kept under review.
“The OCR is only one factor that banks take into consideration when setting interest rates. ANZ looks at this and other factors, including the cost of funding, the cost of capital and operating expenses.
“A risk-based pricing approach is used to determine customer interest rates for our rural and business lending customers and the risk profile of these customers is very different to housing. We assess things on a case-by-case basis as no two farmers have the same businesses.”
A Rabobank spokesperson says, “A decision on a cut to our variable base rate will be made shortly at which time this will be communicated to our clients as a priority.
“In general, when it comes to total pricing for clients, decisions are made on a client by client basis and take into consideration a number of factors including risk.”
As for fixed rates, they say, “Rabobank’s pricing is streamed from market rates and as a result rural lending fixed rates adjusted immediately following the recent OCR review. In effect, the full market impact is already included for new fixed rates.”
Neither ANZ, nor Westpac, ASB or Rabobank have provided interest.co.nz with their base floating rates.
A Westpac spokesperson explains, “The base rates vary by product and lending facility offered and we assess each situation on a 1:1 basis. It means there are too many variables open to interpretation to provide rates.
“It's important to note Westpac remains committed and well positioned to work with our Agri customers through the cycles the industry is facing. The key issue remains for farmers to talk regularly with their bank and advisors. We will always try to work with our customers to get the best outcome for all.”
Fed Farmers: You'd assume banks are passing on as much as they can
Federated Farmers president Dr William Rolleston says, “We would like to see it all passed on, but banks have to work in a competitive environment, so one would assume they were passing on as much as the interest rate that they feel they’re able to.
“They’ve got to balance their competitiveness in the marketplace against the risk they run and the cost of borrowing.
“The OCR is only one of the factors to consider, because most banks borrow a lot of money from offshore, so then they’re actually dealing with offshore interest rates and the risk of the dollar and all those sorts of things. (See Gareth Vaughan’s opinion piece on this).
“The best thing the banks can do is to work with their individual customers, and make sure they get through. And that means the banks do need to be reasonably resilient.
“To me it seems like a cheap shot to say the whole lot [the 25bps OCR cut] has to be passed on. I would prefer the banks worked with farmers and had an eye on their long-term prospects.
“I would prefer the banks acted responsibly with their customers, rather than made rash decisions to make themselves look good.”
51 Comments
What say they have been convinced to pay fixed in the swap to receive floating to pay down the 3mth reset bank bill borrowing facility? ANZ claims, as of 30 Sep 2015, it has more than $1 trillion of interest rate swaps on it's books - which way do they lean? Some entity has to find the collateral call when swap rates move against it.
Secondary to that, if a farmer has entered into a swap, then they have elected to swap floating payments for fixed, and therefore movements in the underlying OCR/floating rate are irrelevant (just as they are to a home owner who has elected to fix their borrowings)
I would say there is a decent percentage (>50%) of the rural book that is floating, and should benefit in full from the drop. Thats not to say at some point banks may look to recoup some of the higher funding costs that they are facing, but i dont believe that to be the case (maybe because they are now recouping this through the residential mortgage book - a guess from me)
Secondary to that, if a farmer has entered into a swap, then they have elected to swap floating payments for fixed, and therefore movements in the underlying OCR/floating rate are irrelevant (just as they are to a home owner who has elected to fix their borrowings)
What are you on about.?
Paying fixed to receive floating in the swap pays off the floating bank liability. Nonetheless, the farmer still pays fixed in a falling interest rate market - hence if semi-annual BEY swap quotes fall below the original fixed contract rate the farmer really is paying over the top and receiving smaller floating payments after netting. Credit risk is created for the fixed receiver bank, hence collateral adjustments are normally called for to mitigate that risk.
As said earlier, the bank covers the Mark to market as a contingent liability. Even through the gfc, I did not see a margin call on out of the money swaps (and they were massive mark to market positions). My point was that you earlier comment (which I can't see any more) is a little irrelevant to the article as it is addressing banks passing on rate cuts to farmers (who have floating debt). If they have done a swap, they have effectively hedged their exposure so although their underlying funding facility will drop with the ocr, the swap should in most cases mean they see no change to their outright borrowing rate. Point of article: are farmers with floating rate debt seeing the full reduction. My answer: for the most part I would think so
Whatever. A falling interest rate market creates payment risk for fixed payers, hence subject to risk profile assessment and credit limit approval - view page lifted from an actual bank offer doc. What's a collateral call if not a contingent liability?
Again.. you are getting caught up in technicality. Yes the bank needs to assign a credit limit for the swap, but it is a tiny fraction of the over all debt. This is a formality, and doesnt affect the credit of the file, nor is it included in calcs for LVR purposes. As long as the borrower continues to borrow, the mark to market is irrelavent to the borrower just as a higher fixed mortgage book is irrelevant to resi borrowers. The bank takes the hit on the M2M. There is a material difference between a collateral call and a contingent liability and that is the fact that no cash changes hands
It's the technicalities that bankrupt counterparties in adverse interest rate market conditions - paying higher interest rates than other farmers paying floating puts one in a relative negative cash flow position - bank demands to increase credit premuims on existing floating loan facilities and a demand for collateral tips the unit over - I contend that ANZ has wriiten $1 trillion interest rate swaps for a purpose - that is to make money. The RBNZ's latest unexpected interest rate cut enhanced that process, as will further cuts.
From a different page on the same offer document.
Interest rate swaps protect against rate movements but prevent any participation in favourable rate movements.
Favourable to whom in what essentially has been an ideologically driven asymmetric downward move in interest rates since 1982. Paying fixed in a swap is dangerous and should not be condoned for normal businesses seeking a funding function from a bank that stands as a profit competing counterparty.
The fixed rate swap payer really needs an investment in a similar rated coupon paying bond to offset the losses in the environment we find ourselves, at the moment. This action demands access to generally unavailable extra cash (doubling the debt?) collateral. The same, but less would be needed to close the swap in the event of a more adverse outcome as rates fall further.
We are now getting into a completely different argument, and that is the merits of fixing vs floating. Again.. my point at the beginning: Farmers who have elected to pay fixed have made a concious decision to fix one variable cost of their business. This has worked well for them in the mid 2000's but as you say in a long term market of declining yields on average it hasnt. Hindsight is a wonderful thing. ANZ is the biggest bank in NZ with a massive balance sheet. That swap position uses capital which demands a return so of course they need to make money on it. But it is a total gross position. If an offshore hedge fund comes in and wants to receive 500m of 2 year, and then later comes in to pay to take profit, that is $1bill worth of swaps they will hold on balance sheet that net off to zero. It is very easy to get to $1trillon in that regard.
Swaps are a derivative which are complex, but essentially every NZer that locks in his or her mortgage causes the bank to go and lock in a swap to pay fixed. It is also what a bank does if a borrower pays the swap, the bank will in 99% of cases mirror it to hedge the book.
But again I will note. The article is about banks passing on the OCR reduction...Not about the merits of using swaps From my knowledge, the vast majority of the debt will be receiving it all.
That swap position uses capital which demands a return so of course they need to make money on it. But it is a total gross position. If an offshore hedge fund comes in and wants to receive 500m of 2 year, and then later comes in to pay to take profit, that is $1bill worth of swaps they will hold on balance sheet that net off to zero. It is very easy to get to $1trillon in that regard.
Capital that is underwritten by under rewarded, OBR captured NZ bank depositors?
“To me it seems like a cheap shot to say the whole lot [the 25bps OCR cut] has to be passed on. I would prefer the banks worked with farmers and had an eye on their long-term prospects."
Who is this guy? This is an OCR reduction not a bank risk margin reduction if a client has higher risk then increase the risk margin. The OCR reduction is separate and should be passed on, wake up William you represent farmers not the Banks.
“They’ve got to balance their competitiveness in the marketplace against the risk they run and the cost of borrowing.
Not paying much to the risk running domestic NZ depositor base, which represents ~half of the registered banks' funding costs. Review table
Its ridiculous , the banks have simply said Thanks Graeme Wheeler , we'll take that margin .
Its time for people power
Kiwis who are usually quick to take to protest should organise two things
1) A "Boycott the Bank" protest and do it one-bank-at -a -time starting with the worst culprit .................
and
2) Encourage EVERYONE with savings in that Bank to go in and withdraw their savings .
The other banks will see trouble coming and quickly get into line
Lets just take a moment here Ms De Meanour , .......... I don't support creditors , I just think its patently unfair for the Banks who already make super-profits here in NZ , to scarper with the margin that our Reserve bank has just facilitated through a rate cut .
Its money -for -nothing for Banks
Frankly , its nonsense that Bank shareholders get this type of windfall for doing nothing at all
I have to agree with Ms de Meanour: if there's anything a mortgage holder detests more than a money-grubbing bank, it's an institution that is not in a sound financial position. With the prospect of rural property prices sliding, it's not a good time for banks to rush into things.
People-Power - Protest Movement
There is a way to smack them
4 years ago I put up a post (can't find it now) proposing if enough people hooked up as a protest movement where each person opens an account with each bank. Of course you gotta have some money in one of those accounts. Then at a specific time on a specific day, notified by an app, everyone, via internet banking, shifts all their funds (less a few dollars) out of Bank A into bank B. The following week, everyone shifts their money from Bank B to Bank C, and so on. It would need enough people to hook up to it, but if they did, there could be enough momentum to hurt, and let-em know
It would be called dis-ruptive technology at work
At the first sign of trouble, the banks up their fees and charges, and on the next rollover the interest rate goes up dramatically, for the simple reason if your friend is on the brink, the bank has expanded the amount owing, so in the event of a winding up the bank gets 20 cents in the dollar on a much greater amount - I know - happened to a client once
Exactly some being managed have interest at 9%, 10%. If run thru by liquidation interest can be 2.0%, 2.5% per month (capitalised).
Its the same money
Hence the need for Winston's mediation Act.
Wouldn't work.. Every day banks look at there cash balances and borrow/lend to other banks to fund shortfalls or earn interest of extra cash. To potentially have any sort of effect you would have to have a collective moving money around outside the big four in the billions of dollars. Not sure why I am responding to these sorts of comments but I guess I have taken the bait.
From what i know.. around 40% of the market would be fixed (a bit of a rough guess making a few assumptions but i think it would be accurate to + or - 10%.
You are using housing rates to form that view, but the banks skew floating much higher and discount fixed terms to entice customers. A farmer at the moment would be facing a floating rate that is very similar to 1-3 year fixed rates, with 4 and 5 year rates more expensive... very different to the housing rate scenario
Below is a press release on this issue from Labour. And there's more from politicians, including Bill English & Nathan Guy, in Bernard's story here - http://www.interest.co.nz/news/80593/english-guy-see-public-and-competitive-pressure-eventually-forcing-banks-pass-ocr-cut
Banks pocket OCR cut while making $90m a week
The Government must pressure Australian trading banks, which pocket almost $90million in profit each week, to pass on the recent OCR interest rate cut and help not only struggling farmers but all New Zealanders, Leader of the Opposition Andrew Little says.
“Offshore banks send billions of dollars overseas each year while the Prime Minister talks about a thousand dairy farmers being forced off their land because of bank debt.
“That’s not right. Those who have profited during dairy’s good times must now come to the table to work through a long-term solution. That should start with passing on interest rate cuts and doing everything possible to keep Kiwi farmers on their land.
“Forced sales will only mean more of our productive land will end up in overseas ownership.
“That’s not good for farmers and it’s not good for our economy. John Key needs to stand up for New Zealanders by telling the banks now is the time to give something back to the industry and to New Zealand.
“It’s in everyone’s interests for New Zealand farmers to be helped through this crisis so that our land remains in Kiwi ownership. Overseas banks need to be reminded of that,” Andrew Little says.
Tatua chief executive Paul McGilvary said the co-operative's existing forecast was under a lot of price pressure.
"We as a company feel for farmers right now because it's not easy out there and the stresses and strains are quite dramatic."
http://www.stuff.co.nz/business/farming/agribusiness/77884262/smaller-d…?
Actually depressing reading that link.
Te ara Miraka. Synlait do something similar.fonterra tell us outr grass feed milk is primo and that's what it's customers want, well will you pays us more cause it's worth more, HELL NO. All we get is double demerits in the first ten days of the season, so bloody punitive just makes me hate the boffins twice as much even without grading.
Just such a different culture, Fonterra is so bloody bureaucratic.
As well as Miraka picking up more farms I see Synlait have another 28. Mymilk not working to well, I hear they have another 3.
Talking to a farmer down south who is going to OCD. I was curious to know why as they were a strong co-op believer. They need the funds from selling the Fonterra shares to reduce their debt. Makes one wonder how many of the new suppliers to the corporates are changing for the same reason, due to them not being able to shift from Fonterra to MyMilk.
Was that 3 to Mymilk nationally or in the Nth Is, redcows?
Banks not passing the OCR cut is unacceptable no one realizes banks hold our kiwi saver money which runs in billions of dollars invested for the kiwis .If they make a loss on the kiwi saver investment they are not liable for it but if they make profit on it still kiwis are liable for fees and brokerage .When banks sitting on large amount of kiwi saver money for sourcing kiwi saver fund is literally free for them instead they charge us admin fee and other things.
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