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Revealed: why the big banks lifted interest rates

Date

Sean Aylmer

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.

38 comments

  • The key issue here is that the banks have enough market power to slug consumers to maintain their absurdly high profit margins no matter what the economic conditions. Among the top ten most profitably banks in the world by ROI, amid a two tier economy nearly in recession - what do we get - record profits! Regardless of whether or not the bank's wholesale funding costs have risen... you won't see their profitability fall like any normal business....

    Commenter
    Yawn
    Location
    melbourne
    Date and time
    April 23, 2012, 9:25AM
    • 1. one of the core objective of the business is PROFITS and if a business is working towards it there is nothing wrong.

      2. ANZ is still 2nd cheapest in the market --good on them

      3. Since GFC Big 4 have created thousands of jobs to cater to massive demand in property lending business

      4. market has changed since GFC and they are adjusting their gears and levers to reflect current situation.

      bottom line is they r still cheaper and continue to offer great products and services

      Commenter
      FHOG
      Location
      Sydney
      Date and time
      April 23, 2012, 9:59AM
    • FHOG - you work for ANZ or a related banking promotions company clearly.

      Commenter
      Yawn
      Location
      melbourne
      Date and time
      April 23, 2012, 10:13AM
    • The banks are private companies and need to make a profit in order to stay viable. If you don't like the way they operate, or don't like the rates they charge - take your business somewhere else. Simple really.

      Commenter
      mimi
      Location
      melbourne
      Date and time
      April 23, 2012, 10:41AM
    • PHOG: this is why we need to regulate the banks more instead of just relying on them to play nice for PR reasons. They occupy an important and privileged place in our economy, and when push comes to shove a protected position (lest we forget the GFC). Maximum profit for the banks is not what's best for the rest of the economy. I don't blame the boards of the banks for seeking maximum profit, that is their job to do, but I do blame both sides of politics for not showing some backbone and doing more than just talk about greedy banks.

      Commenter
      Arky
      Date and time
      April 23, 2012, 10:53AM
    • A few friends of mine bought in the past 18 months, none of them borrowed from the big 4 (unless they work for that bank).

      Holding the biggest market share does not mean it is not shrinking.

      Commenter
      N0tR3allyz
      Location
      Sydney
      Date and time
      April 23, 2012, 11:08AM
    • They actually lifted profits during the GFC and have maintained that level since and that is the new normal for them.A shameful and disgusting act by a company or group of companies during hard times.

      Commenter
      disgusted
      Location
      manly
      Date and time
      April 23, 2012, 12:56PM
  • 1. So why not disclose how much their funding costs fell compared to how much they cut their rates back when rates were being cut? Maybe because it will show that they ballooned their margins and made super profits, draining money away from consumers and businesses which could have used it more?

    2. Frankly, while I'm sure if put to it they could produce a calculation to back this, I'm sure that they could also produce a calculation to show their funding costs haven't risen that much if it suited their purposes to do so.

    Commenter
    Arky
    Date and time
    April 23, 2012, 9:31AM
    • They r still the second cheapest in terms of rates...I do not understand why people are still making a big issue.

      Commenter
      FHOG
      Location
      Sydney
      Date and time
      April 23, 2012, 9:54AM
      • It's good to see someone prepared to stand-up for the banks - it's too easy to bash them - they're an easy target. I question however FHOG's comments @ 9.59am that said bank's had created thousands of jobs to cater for the massive demand in the property lending business. Sorry, this is hogwash. As an ex-banker, who has been retrenched I have a better insight into this industry than most.

        Commenter
        Rod
        Date and time
        April 23, 2012, 10:23AM

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