ANZ surprises with bigger rate cut than its rivals

ANZ has thrown down a challenge to its rivals, cutting home loan interest rates by a bigger margin than the Reserve Bank's rate cuts for the first time in this cycle.

After banks repeatedly failed last year to pass on official rate cuts in full, ANZ lowered mortgage rates on Friday by 0.27 percentage points, more than this week's official cut of 0.25 percentage points.

The move takes ANZ's standard variable mortgage rate to 6.13 per cent, equal to the rate charged by National Australia Bank, which has had the lowest advertised mortgage rates for almost four years.

The decision to out-cut the RBA is a response to falling funding costs and competition among lenders for home loan customers, and could lead to the return of a trend not seen for more than a decade.

CLSA analysts said the last time a similar trend emerged, where banks were forced to surpass the Reserve's rate cut, was in the late 1990s, when Aussie Home Loans sparked an outbreak in mortgage competition.

The big banks are set to announce combined earnings of more than $26 billion this year.

The chief executive of ANZ's Australian business, Phil Chronican, said the move was driven by a fall in funding costs and a plan to steal market share from rivals. Banks extract a significant chunk of their profits from the $1.1 trillion mortgage market, and Mr Chronican signalled competition was heating up.

"We've been monitoring action both through the bank's own channels and through brokers, and I think we've now got to the situation where almost all the banks are saying publicly they expect to grow in line with the system as a whole," he said.

"Obviously, that's pretty hard to do unless somebody's losing share, so we can expect this to be a pretty competitive market."

ANZ has been the most aggressive in trying to sever the long-standing link between Reserve Bank decisions and movements in mortgage rates. In December 2011, it announced it would review interest rates each month, independently of the central bank.

"Having asked our customers to bear some of the funding cost increases over the last year or two, when we saw the opportunity to pass a little bit back to our customers we thought it was appropriate to do that," Mr Chronican said.

He said he did not expect a mortgage price war, referring to NAB's pledge to offer the lowest mortgage rates of the big four in 2011, only to later bring its rates into line with its rivals.

ANZ, which has the smallest presence among the big four in the mortgage market, has also been aggressively expanding market share in recent months.

Its cut is the first time a big bank has given borrowers a bigger reduction in rates than the RBA since the central bank began its latest cutting cycle in November 2011.

Since the global financial crisis, the gap between the cash rate and mortgage rates has blown out from about 125 basis points to close to 250 basis points. With costs now falling, banks are under pressure to return savings to borrowers.

NAB chief executive Cameron Clyne conceded on Thursday that it would be harder to hold back part of any future interest rate cuts from borrowers, because the war for deposits had eased.

Aside from grabbing good publicity, ANZ has several big reasons for going above and beyond this week's official reduction in interest rates.

It has the smallest exposure to the lucrative mortgage market of the big four, so cutting an extra two basis points on top of the Reserve's move is less of a drag on profits.

Also, the bank has recently been making a concerted push to take mortgage market share from its rivals, and this should help.

Latest figures put ANZ's share of the $1.1 trillion home loan market at about 15 per cent, compared with more than 25 per cent for both Westpac and the Commonwealth Bank and more than 17 per cent for NAB.

While the bank makes much of its Asian expansion plan, chief executive Mike Smith said last month it had made "tactical" investment in its domestic mortgage book this year.

"Everybody has always concentrated on the Asian story ... but we should be growing everything, we've got to put the foot to the gas everywhere," he told BusinessDay.

ANZ is also the least reliant on wholesale funding, which allows it to benefit more from the improvement in global credit markets.

JP Morgan analysts have estimated that while other banks have to refinance up to $30 billion a year in wholesale debt, ANZ needs to roll over about $19 billion a year

The cut may also help ANZ regain popularity, having slipped from the top of customer satisfaction ratings to third in the last few years.