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Facts and integrity behind rates move

Date

Philip Chronican

Sparked debate ... "We accept the decisions we make when funding costs are rising are not popular or easy."

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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48 comments

  • About time you came out and actually stated what most intelligent observers of funding already know. It's long overdue and good to see.

    Unfortunately, you're going to be shouted down today by ill mannered, poorly educated borrowers who simply don't want to listen because of their own poor financial acumen. They'll point to the so called "massive" profits and ignore the simple logic of not lending new money at a loss that you are stating here. Good luck. It's a battle with fools. And the problem there is that if you argue with a fool, a passer by may not know who is who.

    Commenter
    Alan
    Location
    Sydney
    Date and time
    April 23, 2012, 8:00AM
    • You're a lovely, high-spirited person aren't you. These 'fools' are customers and members of our community, and are impacted by decisions banks make to protect profits. Fair enough - no-one ever said a bank was doing it as a community service. But, how is it useful to brand everyone who doesn't have a high degree of expertise in financial funding models a fool? Is it only people with the most well developed knowledge who may comment? Presumably you would be happy for me to brand you a fool if you don't have a well developed sense of expertise in medical issues and ever commented about your treatment by a doctor if it wasn't what you would have expected? I'm glad we're not friends - you sound like not a very nice person. Fool.

      Commenter
      Steve.
      Location
      Battle with fools...
      Date and time
      April 23, 2012, 11:12AM
    • So a borrowed dollar for the ANZ cost an extra 0.0002c over last month, I’m working off my figures here, that I will never release, and you must believe me because I control the only information that can contradict me. Im a bank

      Commenter
      Its play time at the ANZ
      Date and time
      April 23, 2012, 11:41AM
    • Sorry, but there is no 'debate' to speak of here. The banks are just engaging in greedy hyper-capitalism. If their costs are going up, I'd expect them to LOSE money, not increase their profits. The fact that they're not, just proves that they have our money on tap.

      Also, since when did finance become the rocket science of modern society? What a sad commentary on the world it is that the way to earn the most money these days is through being a banker. What ever happened to the noble professions that actually contribute something to society. I don't mind doctor's earning the big bucks, because they save lives and generally have to face massive intellectual barriers to entry. But bankers? Most of them don't even have degrees, and if they do, it will be in disciplines that belong in colleges and TAFE, not universities.

      Commenter
      BigBlackDog
      Location
      Sydney
      Date and time
      April 23, 2012, 12:27PM
    • Why do we have to always criticize successful companies.
      If people do not like a particular brand they are free to ;

      3 -- terminate all the services with the bank and take business to another bank who can meet their requirements
      2 -- laws are there to protect customers who want to move there business to another business
      1 -- try to negotiate with a bank or business to change their terms

      customers are a intelligent species and they cannot be fooled or coerced to buy product or services from a particular business in a democracy. If ANZ has acquired many customers and as a result delivered huge profits and dividends to its share holders then they have done what they are supposed to do.

      People please STOP whinging and get on with with your work.

      Commenter
      FHOG
      Location
      Lala land
      Date and time
      April 23, 2012, 12:39PM
    • Hey Allen, nobody can explain to me why I now have to pay higher interest rates because of higher borrowing costs. I got my loan in 2006, why I am now paying a higher interest rate for new borrowings? You sound like you work at a bank, please explain this one to me.

      Commenter
      Betty
      Date and time
      April 23, 2012, 12:44PM
    • Look, if I sell apples and the costs of apples from the farm went up, do I sell apples for a higher price? Yes.

      Same for the banks. If you don't like it, you'd just take your money elsewhere. The whole system is very healthy and fair, quit the whinging already.

      Commenter
      David
      Location
      Melbourne
      Date and time
      April 23, 2012, 12:59PM
    • Your argument, Alan, would have some merit if their were indications that ANZ struggling. But they're not. In fact, they appear to be posting record profits every quarter. So it is a spurious argument to suggest that people ought to accept any increase the banks impose. There is not enough regulation of these banks. Legislation should be in place to link bank interest rates with the RBA rates. You cannot win this argument if the company you are talking about is making massive profits month after month - and sacking workers at the same time. The banking industry it is clear completely lacks any moral compass.

      Commenter
      The Redman
      Location
      Canberra
      Date and time
      April 23, 2012, 1:06PM
    • Betty,

      because you signed up to a variable rate loan.

      Why are you blaming someone else for upuir situation when you clearly made the decision to put yourself in it without understanding the consequences?

      Commenter
      AJ
      Location
      Sydney
      Date and time
      April 23, 2012, 1:06PM
    • Alan, I think the above comments just proved you to be correct.

      Commenter
      Jack
      Location
      Balmain
      Date and time
      April 23, 2012, 1:17PM

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