Saturday, November 13, 2010

Squirming all the way to the bank

The last two of the major four Australian banks to act on the Reserve Bank rate rise have passed on substantial rises to their beleaguered customers. While the RBA announced a quarter of a percent interest rate rise on Melbourne Cup Day last week, today the National Australia Bank lifted its standard variable rate 43 points to 7.67 percent while Westpac added 35 points taking their standard variable loan to 7.86 percent. ANZ announced a similar hike yesterday.

All three were slow to act after Commonwealth’s early response of 20 points above the RBA addition unleased a week and a half of frenzied attacks against the banks. Both media and politicians had their reasons for lashing the banks and with the CBA and its CEO Ralph Norris taking most of the heat Westpac, ANZ and NAB scurried off to the bunkers to contemplate how to sell their response.

It was never in much doubt they too would pass on inflated rises. Like the Commonwealth, all three acted in the best interests of their board not their customers. While all four expected some adverse consumer reaction, the four majors could rely on the vast majority of their customers to grudgingly accept the rises rather than go through the hassle of changing over to cheaper options provided by loan operators, credit unions and building societies. Between them the Big Four control over 86 per cent of the Australian mortgage lending market.

The media release NAB sent out today to announce the rise is a masterpiece in sleight of hand. In the same first breath as it announced the size of the raise, it maintained it was still “highly competitive” against the other banks. It is true they remain the cheapest of the big four by 13 points. But they are not highly competitive when measured against Wizard/Aussie or RAMS. Building societies such as ABS and Heritage are also between 10 and 20 basis points cheaper than NAB. Credit unions have cheaper loans still with Credit Union Australia offer a (pre rate rise) standard variable of 6.87 percent, almost a full 100 points cheaper than Westpac.

The trigger for the bank’s money grab was the initial decision by the RBA as everyone in Australia was tucking into chicken and champagne ahead of the Melbourne Cup. RBA Governor Glenn Stevens began with apparent good news. The economy was purring along in good shape. Confidence is returning, he said, employment is firming and business is being stimulated by global growth and high commodity prices. Trouble was these conditions generally brought increased inflation with them. “Inflation is likely to rise over the next few years,” said Stevens. “This outlook, which is largely unchanged from the Bank's earlier forecasts, assumes some tightening in monetary policy.”

The RBA "tightened" monetary policy by 0.25 percent. While Melbourne Cup was ending, the Commonwealth was first out of the blocks. The additional 25 points was not tight enough for them. The Commonwealth raised their home loan variable interest rate from 7.36 per cent to 7.81 per cent a year, a jump of 45 points. Group Executive, Retail Banking Services Ross McEwan blamed the additional 20 point rise on the “sustained increase in the Retail Bank’s wholesale funding and retail deposit costs”. McEwan said money was more expensive since the GFC and as older and cheaper funding arrangements expire they had to be replaced with more expensive funding. Commonwealth said consumer deposits which formed 60 percent of their home loan funding were now more expensive because of “increased competition".

After nine days of silence from the other majors, ANZ came out with their plan yesterday. They bumped their rates up 39 points to 7.80 percent and blamed “the sustained rise in the cost of funds in recent months”. ANZ CEO Australia Philip Chronican dressed the decision up as taking “the lead in doing more to give customers’ choice and to help them manage their finances in this uncertain interest rate environment.”

Like the NAB, Westpac waited until today to tell us their news. They added 35 points taking their standard variable loan to 7.86 percent, the highest of the four majors. Group Executive, Westpac Retail & Business Banking Rob Coombe was wheeled out to deliver the bad news. “This was a very difficult decision brought upon us by average funding costs that continue to rise, and was only made after the most careful consideration.”

NAB didn’t bother disguising their news as “careful consideration”. Instead they asked consumers to look at positives. As well as their fabled competitiveness, they were reducing their greenhouse gas emissions (no doubt causing jubilation among green mortgage holders) while asking for sympathy while they continue to absorb "a significant portion" of its increased average funding costs. The problem with these arguments are the banks recent profit statements. In 2010 NAB cash earnings increased almost a fifth to $4.6 billion. Commonwealth did better still with a similar percentage increase to $5.7 billion. Westpac were on the same path with cash earnings of $3 billion for the first half of the year, as were ANZ with $2.3 billion.

Part of the reason for these high profits are Australia’s high interest rates compared to most other developed other countries. The US, Canada, UK, Japan, the Euro Zone and Switzerland all have official rates of 1 percent or under. Only the steamrolling economies of China, India and Brazil have higher rates than Australia. But there is a second reason that enables bank customers as taxpayers to feel angry. The huge profits are a reflection of the privileged position enjoyed by the banks resulting from the Australian Government’s bank deposit guarantee.

The guarantee was withdrawn at the end of March but kept Australia stable in the post Lehman Bros collapse era. The State acted as guarantor to $32 billion worth of bank borrowing from international credit markets. On behalf of those unhappy taxpayers (and with his own job on the line) Treasurer Wayne Swan led the charge against the banks. “What we've seen in terms of the profitability of our banks which have been restored to pre global financial crisis levels,” he said, “means that any increase over and above the Reserve Bank increase is simply not justified.” Swan has an undoubted political agenda but the management double-speak used by the banks to justify the inflated rises would appear to bear him out.

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