Back in July, I wrote an open letter to the bank CEOs highlightling the extent of their margin grab from floating-rate mortgage borrowers.
I followed that up, pointing out that it is not principally home owners who are funding this margin grab. Rather it is small business and farmers who borrow based on the floating rate benchmarks
The margin grab continues – albiet with a sanitising term deposit salve – and we can now extend and update our tally of how much the banks have withheld.
The current round of retentions involves the largest grab we have seen so far. In March they held on to 11 bps of the OCR cut. This time they have held on to 15 bps of the 25 bps cut. (These averages would be higher if we did not include Kiwibank.)
These grabs are cumulative and they are mounting up, as the table below shows.
Finance Minister Bill English is on record calling for the policy reductions to be passed on through to borrowers via market competition (although he got badly off track batting back opposition calls for the same thing).
Prime Minister John Key has made similar calls.
And the governor of the Reserve Bank, Graeme Wheeler, this week said the banks should pass on most of it to borrowers.
These calls by public officials are being ignored by bank CEOs.
The current series of rate cuts started with a -25 bps OCR reduction on June 15, 2015 when it was reduced from 3.50% to 3.25%.
There have been five more similar cuts since then with banks passing on the full -25 bps reduction to their clients for the first three of them.
Here is the track record so far:
|The track record …||1-Dec-15||10-Dec-15||28-Jan-16||10-Mar-16||28-Apr 16||9-Jun-16||18-Jul-16||11-Aug-16||Total
|– change bps||-25||-25||-25||-75|
|– avg change bps||-20||-14||+2||-10||-42|
|shaded cells||show margin grab|
|90 day bill rate||2.85||2.75||2.70||2.38||2.39||2.41||2.37||2.23|
|– change bps||-10||-5||-32||+1||+2||-4||-14||-62|
|CDS Aust IG||125.6||125.5||143.6||144.5||115.5||109.2||95.6||90.2|
|– change bps||-0||+18||+1||-29||-6||-14||-5||-35|
|6 m term deposit||3.36||3.33||3.31||3.23||3.15||3.12||3.18||3.20||-16|
|1 yr term deposit||3.51||3.49||3.43||3.41||3.25||3.25||3.24||3.31||-20|
|– avg change bps||-2.5||-4||-5||-12||-1.5||+2.5||+4||-18|
Kiwibank stands out as having only withheld -10 bps from its customers over this period. At the other end of the scale, BNZ stands out as having retained -50 bps or two thirds of the OCR rate cuts.
All bank CEOs claim their margins are under pressure. But the public evidence does not support the claim.
No bank, or their industry lobby group, has revealed any data yet to support the “under pressure” claim.
What we see in the public record does not support the claim. The 90 day bank bill rate has fallen by -62 bps, and the risk premium (as measured by CDS spreads) has fallen by -35 bps. These reductions add together.
Personally, I don’t buy the recent tactic of offering higher terms deposit rates for selected terms as anywhere near rebalancing the ledger. It is only a PR strategy. They are borrowing this tactic from their Aussie parents and the evidence across the ditch is that the ‘benefit’ will be very short-lived.
Revealingly, equity analysts who follow banks for stock market reviews applaud the bank actions as enhancing margins.
And no bank is reporting significantly lower profit. In fact one is still reporting a long-running stream of record profits.
Without the banks providing concrete evidence, the “margins under pressure” claim has little credibility.
There are victims here; small business and farmers.
It seems a simple case of a dominant oligopoly imposing its pricing power on its customers (without fear of any official or public body acting to restrain them). By their actions, it appears the four largest banks are acting in concert and pulling their floating rates into a very tight band.
At the start of this margin-grab cycle, there was an 11 bps range between the four biggest banks. Now that has almost halved to a range of only 6 bps.
There seems a clear case for a public inquiry into how banks are behaving in this matter and to construct a system where oligopoly power is restrained. Clearly market forces are not working. There is no sense of any healthy competition in pricing for floating rate mortgage-based lending.
Bank pricing actions give the unsettling impression of growing collusion, even if it does not involve direct communications and secret meetings. The RBNZ OCR cuts seems to have given them the cover to pull this off.