Sparked debate ... "We accept the decisions we make when funding costs are rising are not popular or easy." Photo: Glenn Hunt
The decision by ANZ Bank to set variable interest rates for mortgage and small business lending on a monthly basis has sparked a great deal of debate. At a time when many people are feeling uncertain about the global economy and their future, these views are understandable and they reinforce the significant responsibilities banks have when making commercial decisions.
While nothing is likely to remove the anger many feel about interest rate decisions, banks such as ANZ are serious-minded institutions and they make decisions based on a strong factual basis. It is not possible to be in business for 177 years, serve 8 million customers and provide almost $600 billion in lending if you are not.
It is difficult to have an informed public debate about these issues when people of influence in the community are not aware of key facts.
In recent days, some people have publicly raised questions about whether ANZ could justify the increase in mortgage and small business lending rates of 6 basis points (0.06 per cent) announced on April 13.
Much has been made of comments by the Reserve Bank of Australia on bank funding costs in the minutes of its April monetary policy meeting. The comments have been used selectively and ANZ's integrity has been called into question.
Banks raise funds to lend to customers from two main sources - from customer deposits and in wholesale markets from domestic and international investors.
In the six-month period from October 1 to March 31, the average cost of ANZ's $75 billion stock of term wholesale funding increased every month, except in December, when credit markets froze because of the European sovereign debt crisis and wholesale markets were closed globally.
Less expensive funding (costing, on average, 72 basis points above the three-month bank bill swap rate) matured and was replaced with more expensive funding (on average, 165 basis points above), reflecting the current conditions in global markets.
As this happened, ANZ's average cost for term wholesale funding increased by 15 basis points from 116 basis points above the three-month bank bill swap rate to 131 basis points above it.
We accept that for most people this sounds complex; however, we believe it is important that we are transparent on these additional costs. The Reserve Bank highlighted its understanding of the situation on April 17 when it said: "Corporate bond spreads had narrowed further and were now significantly lower than at the beginning of the year, though still higher than in the middle of 2011, particularly for banks."
While much is made of wholesale funding, the primary source of lending is customer deposits. Announcing the outcome of our monthly interest rate review in April, ANZ said that: "Increased competition for deposits, particularly term deposits, is currently the most significant driver of rising funding costs."
In the six months since October 1, the difference between the Reserve Bank's overnight cash rate and the average amount that ANZ pays to depositors has also risen - up 28 basis points from 0.41 per cent to 0.69 per cent above the cash rate.
This was also highlighted by the Reserve Bank on April 17: "As a consequence of banks competing aggressively for term deposits, their cost had risen materially relative to the cash rate."
The bottom line is that, when you take 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 our variable interest rates have risen by 12 basis points.
When ANZ moved to set interest rates on a monthly basis last year, we promised to be more transparent about bank funding costs, with a view to increasing understanding about our commercial situation. We did this as an institution that is serious about its responsibility to balance shareholder needs against those of customers, the need to support continued growth in the economy and the wider interests of the community.
We accept the decisions we make when funding costs are rising are not popular or easy, and many people have strong views about them. It is, however, difficult to have an informed public debate about these issues when people of influence in the community are not aware of key facts.
ANZ does make decisions with integrity and using a sound base of facts, which we will continue to share with our customers and with interested stakeholders - including at our forthcoming half-year financial results, which will be announced on May 2.
Philip Chronican is CEO of ANZ Australia.
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