THE DISTILLERY: Westpac warfare

While borrowers might celebrate falling interest rates, the banks are mustering their troops for a battle over depositors and Westpac Bank boss Gail Kelly is the latest general to lay out her battle plan. Is Westpac's multi-brand strategy too cost effective, as CBA's boss might have you believe, and how are mortgage holders going to be marginalised by this shift? All these questions are deposited in Friday's edition of The Distillery.

The Age's banking writer Eric Johnston says Kelly vigorously defended her multi-brand strategy, headlined by the reintroduction of Bank of Melbourne, during questioning yesterday.

"Rival boss Commonwealth Bank's Ian Narev recently made a jibe at Westpac's approach, saying his bank would not pursue a strategy built around ‘differentiation of a lot of different brands'. However, in the same sentence, Narev also outlined his commitment to keeping CBA's Bankwest unit. Much of the focus has been on the Bank of Melbourne experiment, which reports through St George. Rebadged from St George in Victoria, the bank is on an ambitious rollout, recently opening branch number 50. It is early days, but Bank of Melbourne has lifted customer numbers by 7 per cent in the past six months, outpacing growth in the broader market. Kelly maintains the multi-branding gives Westpac the opportunity to win a greater share of the market.”

Of course the emphasis on winning customers has shifted from borrowers to depositors, a theme that runs throughout all commentaries on banking this morning. The Australian Financial Review's Chanticleer columnist, Tony Boyd, explains how shift in emphasis has consequences for the other end of the lending business.

"There is a flip side to a war for deposits. It means business and home loan borrowers will pay higher rates of interest relative to the official cash rate. Deposit rates are high relative to the Reserve Bank's official cash rate, and in absolute terms compared with the past 20 years. That is set to continue as banks such as Westpac try to bring their loan-to-deposit ratios down to about one-to-one in readiness for tougher regulatory rules. On this front, Westpac has more to do than any other bank. It has the highest gap between loans and deposits of the big four, largely because of the legacy of its takeover of St George Bank. St George has loans of about $144 billion and deposits of about $74.4 billion. It needs to close that gap, and the man being asked to do it is one of the rising stars in Westpac. When Kelly wanted to create a ‘deposit culture' at St George, which has been a poor performer relative to the Westpac brand, she called on Jason Yetton, the group executive, Westpac retail and business banking.”

Business Spectator's Stephen Bartholomeusz says Westpac Bank probably offers the best glimpse into the Australian banking sector.

"Westpac, almost a purely domestic financial services business, doesn't have National Australia Bank's UK baggage nor ANZ's Asian growth to distract from the performance of its core businesses, so the flat-lining in its performance provides a clear view into the system. That the group was able to produce even the slightest of increases in cash earnings was attributable to a respectable performance on costs, a rebound in markets-related income in the second quarter and a very solid increase in its New Zealand earnings. The core Australian businesses, both banking and wealth management, are struggling to generate any growth.”

And sticking with banking for a moment, The Sydney Morning Herald's Elizabeth Knight says it looks like NAB's push for a greater slice of the mortgage market is easing. But the writer asks, what is CBA up to?

"Over the past month or so Commonwealth Bank's actions suggest a different strategy. Until recently CBA has been prepared to sit back and allow NAB and ANZ to take the lead on increasing market share in mortgages. But its decision yesterday to cut 40 basis points off its variable rate to take it to within a whisker (2 basis points) higher than NAB suggests it may be back on the offensive. CBA chief executive Ian Narev said recently that improvement in customer satisfaction was a major objective for the organisation – and attractive mortgage rates would feed into this. It appears it was waiting to price its interest rates off NAB – the lowest in the market – rather than waiting to see what Westpac or ANZ were doing. As far as deposit rates are concerned, CBA was staying mum, saying it was still under review.”

The Australian's Richard Gluyas reminds readers that Westpac's chase for deposits marks a complete 180 degree turn from its strategy just a few years ago, when it accompanied CBA in a big push for mortgages as ANZ Bank and National Australia Bank were occupied with other issues.

The other big story yesterday was the corporate regulator's victory in the High Court against James Hardie. The Age's Malcolm Maiden says the decision re-invigorates all government regulators and directors have been left in no doubt about their responsibilities. The Australian's Bryan Frith kept his eye on the company directors lobby group, the principle opposition to this decision, and spent his time wisely, while his colleague Bryan Frith gives the definitive background on the decision.

Meanwhile, Fairfax's Insider columnist Ian McIlwraith noticed that Telstra shares finally hit their levels – briefly – reached before the Future Fund started selling down its stake.

Giles Parkinson writes in The Australian that the federal government appears to be learning from past failings and is pushing to keep the fruits of Australian R&D kept in Australia.

And The Australian's economics correspondent Adam Creighton rallies against the pay increases for Australian public servants, arguing that many of them receive more than the $200,000 the head of US Treasury gets. Couldn't you just as easily argue that the head of US Treasury is grossly underpaid? Or maybe such a position bears great fruits later on?