Monday, April 23, 2012

We're an open book. Our costs are going up - ANZ

The ANZ has hit back at claims it is gouging by lifting mortgage rates independently of the Reserve Bank saying its monthly adjustments are to recover costs and not to widen margins.

In an article published in the Herald today the chief executive of ANZ Australia Philip Chronican says the bank’s wholesale funding costs increased in all but one of the past six months.

“As 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, ANZ’s average cost for term wholesale funding increased by 15 basis points,” Mr Chronican says.

The relative cost of deposits climbed even more as the gap between the Reserve Bank cash rate the average amount the ANZ paid depositors climbed by 28 points.

A spokesman for Treasurer Wayne Swan was unimpressed, pointing to this month’s Reserve Bank board minutes which said wholesale funding costs had eased in recent months.

Speaking to the ABC from Washington where he has been attending a G20 finance minister’s meeting Mr Swan referred to “debacle” of the Coalition defending the ANZ rate hike.

The ANZ has lifted rates twice out of step with the Reserve Bank in recent months, by 6 points in February and a further 6 points in April.

Its competitors have lifted rates by between 9 and 15 points. It says although it has lifted rates more slowly its mortgage and small business rates “remain in line” with its competitors.

“We accept the decisions we make in an environment where funding costs are rising are not popular or easy, and in an uncertain economic environment many people have strong views about these decisions,” Mr Mr Chronican writes. “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 or are willing to misrepresent them.”

In Washington Mr Swan announced the commitment of a further $7 billion to the International Monetary Fund to assist countries in financial trouble. He said if called upon the loan would be repaid with interest.

In today's Sydney Morning Herald and Age



Integrity and transparency on bank funding costs

Philip Chronican, CEO, ANZ Australia

ANZ’s decision to set variable interest rates for mortgage and small business lending on a
monthly basis has sparked a great deal of debate in recent months. At a time many people
are feeling uncertain and worried about the global economy and their future, these views
are understandable and they reinforce the significant responsibilities that banks have when
making commercial decisions.

While nothing is likely to remove the anger many people feel about decisions on interest
rates, banks like ANZ are serious-minded institutions and they make decisions based on a
strong factual basis. While some challenge this, it is not possible to be in business for 177
years, serve eight million customers and provide almost $600 billion in lending if you are not.

In recent days, questions have been raised over whether ANZ could justify the increase in
mortgage and small business lending rates of 6 basis points (0.06 per cent) that it announced
on 13 April.

First, it is useful to point out that following ANZ’s earlier decision in February to increase
interest rates by 6 basis points other Australian banks increased their interest rates by
between 9 and 15 basis points. 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.

Although that may be reassuring for customers, it doesn’t answer the question as to whether
the increase was justified.

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 issued on 17 April. The comments have
been used selectively by some to reflect particular perspectives 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 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.

As 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, 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.

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 however highlighted
its understanding of the situation on 17 April when it said: “Corporate bond spreads had
narrowed further and where 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. In announcing the outcome of our monthly interest rate review in April, ANZ stated
that: “Increased competition for deposits, particularly term deposits, is currently the most
significant driver of rising funding costs.”

In the six months since 1 October 2011, 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 17 April: “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, 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.

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
the commercial situation we faced. 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 in an environment where funding costs are rising are not
popular or easy, and in an uncertain economic environment many people have strong views
about these decisions. 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 or are willing to
misrepresent them.

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 2 May.



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. Why the ANZ moved

. You've got to hand it to our banks - Stevens on profits



2 comments:

Marginal Utility said...

While much is made of wholesale funding, the primary source of lending is customer
deposits.


Since when did commercial banks start using customer's deposits for lending ?

My understanding is that the sole purpose of such deposits is to meet the RBA's reserve requirements, to ensure the payments system functions smoothly.

Commercial banks leverage their capital, not their liabilities.

And that means that borrowing costs to meet reserve requirements are a small fraction of their lending.

So an increase of 15 bps in the cost of wholesale funding would have an almost negligible effect when considering the costs of creating a loan.

son_of_will said...

If Banks were serious about being transparent they need only present a simple pie chart with the breakdown of funding.

And while you're at it throw in a chart plotting their funding costs against the interest rate they charge their customers over say the past 10 years and then we're getting somewhere.

That way we could clearly see their "operations" costs over time.

What I don't understand is why can't the banks source all their funding from the reserve bank.

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