Saturday, October 18, 2008

Why the ANZ cut

Take a bow, Mr Rudd. Take a bow, Mr Swan. You are responsible for the extraordinary out-of-cycle rate cut by the ANZ bank, and in more ways than the ANZ cares to acknowledge.

On Sunday after crisis talks with officials the Prime Minister announced that the Government would act as a guarantor for the overseas borrowings of Australian banks and other deposit-taking institutions.

Although the details of the scheme haven't yet been worked out, and although its woolly nature has come under attack from the Opposition, its mere announcement of it has made it cheaper for Australian banks to borrow overseas.

But that wouldn't have been the only consideration weighing on the ANZ as it decided to cut its mortgage rates ahead of a move from the Reserve.

It would have been aware that it is facing reinvigorated competition...

On Sunday Mr Rudd also committed his Treasury to funding another $4 billion of mortgages to be sold though non-bank institutions.

On top of the $4 billion of non-bank mortgages that the Treasury funded last month, the supply has dealt non-bank lenders back into the game.

Once important in the mortgage lending business, the non-bank lenders' share had collapsed from 25% to 10%.

Kevin Rudd's move has given them the ability to build that back up — unless banks such as the ANZ cut their rates to remain competitive.

The other banks won't like it, but they will have to follow the ANZ, unless they want to lose market share.

Wayne Swan and Kevin Rudd have made sure of it.

UPDATE: Nicholas Gruen has messaged me: "I wonder if you’re right that the ANZ cut because of the money the AOFM is putting into RMBS. They don’t seem to me to be putting enough in for the ANZ to be too worried about that."

I have also heard that much more would be needed to have an effect. Against that, the very fact that the Commonwealth is buying these securities will get the other investors to.

ANZ goes alone on rates

The ANZ has ignited a new mortgage rate war, becoming the first bank to cut its standard variable rate independently of a move from the Reserve Bank in more than a decade.

Late Friday after the close of business the ANZ announced a cut in all of its standard variable mortgage rates of 0.25% to take effect Monday week.

“It’s a bit of gamble really,” the bank’s Australian operations chief, Brian Hartzer told The Age.

“When we raised out rates out of cycle at the beginning of the year we were very clear with our customers and with ourselves that these were extraordinary times and that when the opportunity came to reduce those rates we would do that.”

Australian bank bill rates have fallen sharply since the government announced on Sunday that it would guarantee the overseas borrowings of Australian banks.

Mr Hartzer said the rates changed on bank bills had fallen 0.20 percentage points since Sunday and were now 0.30 points below the Reserve Bank’s cash rate.

“As the details of the guarantee becomes clearer we think it is likely that that risk premium will begin to fall pretty significantly, so we are confident enough to take a gamble and pass on 0.25 points.”

“We are not out of the woods yet, we are still in for a bumpy time, but there is no question that what the government has done has played an important role in reducing our funding cost.”

The Treasurer Wayne Swan in Sydney for a summit with business leaders said he was “delighted”.

“What a wonderful piece of news heading into the weekend, coming on top of the 0.80 points rate cut last week.”

“We said we expected banks to pass on additional rate relief when it was possible and I am glad to see the ANZ has started delivering.”

The ANZ has now given back 0.25 points of the 0.55 points premium it and other banks added to their margins over the Reserve Bank cash rate this year.

Senior analyst at the rate monitoring firm Cannex Harry Senlitonga said unless the other banks followed, the ANZ would rapidly increase its market share.

“I would advise customers not to switch to ANZ just yet, but to wait and see what the other banks do,” he said.

The new ANZ standard variable rate of 8.32% is well below the 9.0% fixed rate that many borrowers switched to earlier in the year.

“Around 60,000 Australians locked in fixed rates at 9.0% in the first half of the year. That’s always the risk. No-one expected the Reserve Bank to cut by 1.00% this month,” Mr Senlitonga said.