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Revealed: why the big banks lifted interest rates

ANZ BANKING GROUP is set to reveal reduced margins at its six-monthly profit announcement next week, after providing an unprecedented look into the financials behind its earnings in the mortgage market.

In a letter to the Herald, the chief executive of ANZ Australia, Philip Chronican, said the cost of raising money to lend to customers had risen and, for the first time for a major bank, provided detailed figures to back up his argument.

''The bottom line is that, taking into account ANZ's funding mix of deposits and short- and long-term wholesale funding, our funding costs are up 18 basis points over the past six months while ANZ's variable interest rates have risen by 12 basis points,'' he said.

The letter from Mr Chronican effectively admits that the net interest margin for the bank - the difference between the cost of borrowing money and lending it - has been reduced. The net interest margin underpins bank profitability.

''In the six-month period from 1 October 2011 to 31 March 2012, the average cost of ANZ's $75 billion stock of term wholesale funding increased every month, except in December 2011, when credit markets froze because of the European sovereign debt crisis and wholesale markets were closed globally,'' he said.

In terms of wholesale markets, less expensive funding which cost on average 72 basis points above the three-month bank bill swap rate - the benchmark for interest costs - was replaced by funding, on average, 165 basis points above the swap rate.


''ANZ's average cost for term wholesale funding increased by 15 basis points from 116 basis points above the … swap rate to 131 basis points,'' Mr Chronican said.

In terms of funding from bank deposits, the difference between the Reserve's overnight cash rate and the average amount that ANZ pays to depositors has increased by 28 basis points, from 0.41 per cent to 0.69 per cent.

The big four compete aggressively and any squeeze on one lender would be mirrored by the other three.

Late last year, ANZ broke away from the usual practice of announcing mortgage rate changes after the RBA board meeting on the first Tuesday of every month. Instead ANZ said it would review interest rates on the second Friday of every month.

In February, and again this month, it was criticised for lifting interest rates by 0.06 percentage points after the Reserve kept the official interest rates on hold. The Treasurer, Wayne Swan, was among the critics. But the three other big banks followed the Melbourne bank's lead.

''Other Australian banks increased their interest rates by between 9 basis points and 15 basis points,'' Mr Chronican said. ''ANZ's cumulative increase of 12 basis points has meant that although it has increased rates more slowly, its mortgage and small business lending rates remain in line with our competitors.''

Asked whether the decision to provide the usually closely guarded figures to the public was an admission the breakaway strategy hadn't worked, a spokesman said the move had created challenges in a competition and public relations sense.

''But we are in it for the long haul and part of that is an education process for our customers and us,'' he said. ANZ is due to outline its profit result for the six months to the end of March on May 2.


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