Avoiding an ANZ rates bashing

If ANZ shifted its home loan rates in the first month after decoupling from the RBA, it would have been attacked, but its new system may be advantageous in the future.

ANZ was never going to alter its variable rates on housing loans in the first review of them since it announced its decision to decouple its decisions on rates from the Reserve Bank’s pronouncements on official rates.

To have done so would have provoked Wayne Swan and an army of bank bashers into a focused attack on the bank and ANZ wouldn’t have been able to do as the majors have generally done in the past when moving rates out of kilter with the RBA; share the odium with their peers.

At some point, however, ANZ is going to have to take that fateful step if its unique policy is to work in educating the bank’s customers that the group’s cost of funds is influenced only modestly by movements in the cash rate.

The banks have struggled to explain to the community-at-large that, while the RBA can influence the yield curve and the absolute levels of domestic interest rates it can’t direct spreads, or the margin the banks have to pay over the cash rate to raise funds. Those spreads dictate the banks’ profitability and they – particularly for wholesale funds raised offshore – have been widening as the financial crisis has flared again.

With the RBA widely expected to reduce official rates further, there may be opportunities for ANZ to move its rates independently without necessarily igniting a furore. Certainly, with its reviews occurring on the second Friday of the month it is possible that at the very least the timing of ANZ’s decisions will be different to the RBA’s and, perhaps, its peers. The RBA board meets on the first Tuesday of each month.

ANZ’s first independent home loan rate movement will, in the current environment of rising funding costs, take some courage and some finessing.

The bank fine-tuned the detail of its policy today, announcing that the effective date for variable rate changes in future will be a week after its announcement, regardless of whether rates were rising or falling.

In the past the majors have tended to be slightly tardy in passing on cuts to official rates, but rather more urgent in responding to rate hikes. ANZ has created certainty for its customers and discipline for itself.

ANZ also spelt out the criteria it is using to assess the rates it charges, saying that it was committed to giving customers competitive returns on their deposits; that it considered the cost of wholesale funding; it took into account its competitive position; it factored in its customers’ ability to afford their loan repayments and it also bore in mind regulatory and prudential requirements.

As the banks try to reduce their exposure to volatile and more costly wholesale funding – and that funding, particularly longer term funding, has become more volatile and expensive as the Eurozone crisis has continued – there is strong competition for customer deposits.

The Australian banks also face an accelerated timetable for the introduction of tougher (and more expensive) liquidity and capital requirements flowing from the international banking regulators’ responses to the initial global financial crisis.

In announcing its decision to maintain its current rate structure, ANZ did make it clear there was pressure on it, due to higher wholesale funding costs and the higher cost of deposits, and that it expected that pressure and the increased costs to be sustained. Against that, as it noted, demand for credit from virtually all sources is very weak.

A number of majors have made it clear that at current lending and borrowing rate they are losing money on new home lending, although that is based on the cost of the incremental rather than average dollar of funding. There will therefore be some reluctance to pass on the full extent of the next RBA rate cut if, as expected, it reduces official rates again next month.

ANZ, of course, given that its review will generally occur 10 days later than the RBA decision (interestingly, next month there will only be a three-day gap because the first Tuesday in the month is the 7th and the second Friday the 10th) will usually have time up its sleeve to consider what its major competitors’ responses have been to any RBA move before it conducts its own review and announces its decision.

While it may not be able to use that to its advantage next month, unless its peers emulate its move, it could provide a useful competitive edge in future.

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