Thursday, December 03, 2009

Thursday Column: The mating call of the banks

Westpac is sending out signals

Westpac executives are unlikely to sleeping easily at the moment. They're certainly not keen to return phone calls and they don't perform very credibly when they do. They're jumpy because for the moment the other big banks have their feet on Westpac's throat. If the other banks co-operate and release the pressure Westpac will survive and continue to prosper as Australia's second-biggest mortgage provider.

If one of them refuses to co-operate, the rivers of gold-plated mortgage customers that have poured through Westpac's doors will dry up.

Westpac's decision to lift its mortgage rates by 0.45 percentage points rather than the Reserve Bank's 0.25 has stunned its competitors. They didn't see such an a big increase coming. That's one of the reasons they're taking longer than usual to respond to Tuesday's rate moves. That, and wanting to drag out Westpac's agony as it waits for the others to back it up.

The cynical view that the big four act as a cartel and co-ordinate their rate moves is far from the truth.

They do however communicate via the radio...

There's even a phrase for the dance they perform. It's called "the mating call of the banks".

One bank talks about what all banks need to do, because they're all in the same boat and hopes the others respond with affirmation, perhaps also on the radio.

But sometimes the banks play tricks.

Throughout the 1980s and 1990s I mediated the process on ABC radio, interviewing one bank and then the other about what they thought needed to happen to interest rates.

As I remember it the National Australia Bank went out boldly in one of the 1980s interviews and declared they would soon all have to put up their rates.

One by one each of the other big four fell into line, saying similar things on ABC radio.

And one by one they all pushed up rates. Except the NAB. As I understood it those wounds took a long time to heal.

Yesterday Westpac retail chief Peter Hanlon couldn't help himself.

Asked by 3AW's Neil Mitchell whether he expected other banks to follow and effectively give Westpac cover he replied: "I I wouldn't speculate. I don't know what they'll do."

But then added, "Look, I'm happy to say this: All of the banks in Australia face exactly the same issue, and it is a peculiarly Australian issue because we do depend too much on overseas wholesale funding, and what we're trying to do with our borrowings and also some of our deposits is to reduce the reliance on wholesale funding. So you are right to point out, all of the banks are in the same boat, but they'll obviously make their own decisions."

Hanlon and his suddenly media-shy chief executive Gail Kelly are paying a more dangerous game than I remember NAB playing in the 1980s. They've already put their cards on the table.

The Commonwealth Bank is in a good position to refuse to dance. Its funding costs are lower than Westpac's because it has more near zero-interest rusted-on deposit customers. Also earlier this year it made a tactical decision not to go out and pay over the odds for deposits, as has Westpac.

It and the ANZ are offering 5.5 and 5.35 per cent for one-year deposits compared to the bolder 6.8 and 6.81 per cent being offered by Westpac and NAB.

The Commonwealth still has still fresh in its memory the verbal dust up the Treasurer gave it in September when it widened its variable mortgage margin by a mere 0.10 points and kept its rate below Westpac's. The ANZ indicated just last month that it is able to hold the line on mortgage margins for the time being.

If Westpac does turn out to have made a mistake, if one of the other banks does refuse to take its foot of its throat, they'll doubtless be internal soul searching, along the lines of "what were we thinking?"

Here's what Westpac was probably thinking. When a senior Reserve Bank official said last month that "margins on variable rate housing lending relative to bank funding costs have actually declined a little over the past two years" it thought it would get official understand if it widened its margins to get them back to where they were before.

It reckoned without two things.

The Reserve Bank is well aware that banks such as Westpac have dramatically widened their margins on business loans. While Westpac has narrowed that amrgin last month by not passing on the November 0.25 point hike to business borrowers, it's still well ahead.

Second. The banks had things exceptionally good two years ago. Times are tougher now. There's no logical reason why their profitably from mortgages should return to where it was in 2007.

Except that there's less competition.

Published in today's Age

See also: Lenders wait for a further lead from Westpac - The Sheet

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