Brutally competitive deposit rates as banks woo savers

Thursday 13th August 2009

Unprecedentedly high deposit rates show New Zealand banks are seeking out savers "in a brutally competitive manner", says the first in a new PriceWaterhouseCoopers report on the country's Australian-dominated banking sector.

"The fact that borrowers are paying higher margins has received much attention," the report says. "But how often have we read that many retail deposit rates are presently above the Official Cash Rate - a phenomenon which is almost unprecedented and reflects the vlaue the banks are lacing on customer deposits as a source of funding.

"In our opening, banks are paying for customers for the value implicit in deposits in a brutally competitive manner."

This will add to other pressures on banks' margins until the dust settles on the current period of "rapid changes in monetary policy", says the PWC report, which analyses the half-year profit announcements of the Australian-owned Bank of New Zealand, ANZ National Bank, ASB and Westpac banks, and the New Zealand government-owned Kiwibank

Attractive corporate bond offers and capital-raising had also siphoned much of the potential growth in bank deposits created by the "flight to quality" after finance company collapses last year.

In the meantime, lending to businesses has slowed very dramatically, especially in the first quarter of calendar 2009, when total business lending fell by 1.3%.

Also dramatic has been growth in the five big banks' impairment provisioning.

"Impaired assets ... have more than doubled in the first six months of their 2009 financial year from $840 million to $1.917 billion and have grown by a favotor of five since the end of the first month period of the 2008 financial year," says PWC, although the loan losses coverage ratio for the New Zealand banks is slightly better than in Australia, "primarily due to the significant corporate collapses that have occurred in Australia which has fortunately not been experienced in New Zealand to date".

Nonetheless, New Zealand bank asset quality fell dramatically in the first half of 2009, with weak economic conditions likely to linger in the second half, despite "occasional almost Sasquatch-like sightings of green shoots in some overseas economies".

New Zealand banks are also starting to disclose more information than ever before about their cost structures as public scrutiny has mounted post-credit crunch. Years of "relentless growth" in operating expenditure had ground to a halt in the first six months of the current financial year.

While the New Zealand banking system had weathered the global financial crisis well because of its low exposure to financial instruments whose value collapsed in the US sub-prime mortgage crisis, there was a downside to that in the near future.

"The flipside is that in an environment where significant loan losses are occurring, the impact on the bottom line will be that much greater. This statistic supports the view held by the Reserve Bank that New Zealanders continue to be more inclined to borrow rather than to save."

Despite lower lending activity and margins, the banks benefited from volatile exchange and interest rates with strong trading performances to offset revenue weakness elsewhere. This would only be sustained as long as globally volatile conditions remained, PWC said.

The report speculates that the four Australian-owned banks will have paid at least some of the approximately $2.2 billion in disputed tax and interest that has accumulated as they challenge Inland Revenue Department tax assessments relating to structured finance transactions over the last decade, to stem mounting interest costs.

The issue is unlikely to be settled before 2011, says PWC, whose chairman, John Shewan's involvement in advice is a central part of the IRD's Westpac challenge, currently being heard in the Auckland High Court.

Businesswire.co.nz

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