Friday 04 May 2012
Rate moves telegraph banking strategies
Just how the big four banks adjust their interest rates this week and next will give us some flavour of their strategies around growing market shares in the mortgage market and the extent to which they are prepared to fight for deposits.
National Australia Bank's move on Wednesday to reduce its standard variable interest rate by 32 basis points says plenty. First, the timing was unusual. Pundits in the industry expected it to be the last cab off the rank. It had given a commitment to maintaining the lowest variable interest rate in the market and in moving first it risked another bank coming in lower.
Its decision to lower rates by 32 basis points, well short of the Reserve Bank's 50 basis point cut on Tuesday, suggests two things.
The first is that it was desperate to claw back some margin and couldn't wait 10 days until ANZ is due to make its move.
Second, its aggressive grab for market share might be easing.
Over the past six months, the NAB has been growing at 2.2 times general growth. It was the result of its deliberate strategy to get into the game in personal banking, where it has been a laggard for years.
The market share grab was supported by its marketing campaign of divorcing itself from the others in the industry and setting the benchmark on lowering a raft of fees.
But this growth has been expensive during a time when the wholesale cost of funds are high and deposit rates are being heavily competed.
Passing on 32 basis points of the interest rate cut and reducing deposit rates by the full 50 basis points should ease the margin squeeze resulting from its recent market growth spurt.
Over the past month or so, the Commonwealth Bank's actions suggest a different strategy. Until recently, the CBA has been prepared to sit back and allow NAB and the ANZ to take the lead on growing market shares in mortgages.
However, its decision yesterday to cut 40 basis points off its variable rate to take it to within a whisker (2 basis points) of the NAB suggests it may be back on the offensive.
CBA's new chief executive, Ian Narev, said recently improvement in customer satisfaction was a major objective for the organisation - and attractive mortgage rates would feed into this.
It appears it was waiting to price its interest rates off NAB - the lowest in the market - rather than waiting to see what Westpac or ANZ were doing.
As far as deposit rates are concerned, the CBA was staying mum, saying it was still under review.
Westpac will announce its rate cut today. At the end of this interest rate shuffle, Westpac will probably still be charging the highest mortgage rate. Its chief executive, Gail Kelly, noted yesterday that having the highest rate in the market had not cost the bank customers overall.
Even if she does not grow customer numbers at the rate of some of her competitors, this does not appear to be of particular concern.
She believes the trend of the cautious consumer seeking to pay down household debt is here for a while yet.
(Back in 2008 and 2009, when the CBA and Westpac were growing their mortgage books aggressively, they suffered from some deterioration in the quality of loans.)
Thus Westpac's focus is more about fighting for deposits. This put some strain on improving the bank's return on equity but it improves balance sheet settings and appeals to ratings agencies, and it also works well for new capital adequacy requirements.
Kelly admitted to standing out of the mortgage market at times over the past six months - concentrating instead on income from larger corporates and transactions.
ANZ's results this week demonstrated it had gained market share - not from having the lowest rack rate on variable mortgages but being the most aggressive in discounting that rate.
But it is not a strategy that has met with great financial success. Its Australian business sustained a 7 per cent decline in profit.
''In Australia, we made market share gains and customer satisfaction remained strong. Our financial performance, however, was subdued, significantly impacted by declining margins,'' the chief executive, Mike Smith, said.
Smith conveyed a sense that market share in the Australian business had growth at a pace that was a bit ahead of the bank's expectations.
Assuming it was now inclined to put the brakes on this mortgage growth, ANZ's rate will probably settle somewhere between the CBA and Westpac.
If one is reading the tea leaves correctly, the NAB may still be looking to increase growth in mortgages but won't be keen to sacrifice any more margin than absolutely necessary. It will better any standard variable rate from the three large competitors, but only just.
The CBA could be looking to increase its efforts to gain a bit of market share. But Westpac won't be entering a discounting war on mortgages.
ANZ will try to claw back as much margin as it can by reducing rates as little as possible, but will probably stay within the pack.