Banks pressure finance coys

Friday, May 4th 2007, 12:16PM

In case it has escaped your attention there is significant action going on in the term deposit and finance sector which is signalling a real shake out.

Over the past couple of months the banks have been taking it to the finance company sector (and each other) with huge rate increases.

During this time we have seen bank term deposit rates increase by margins of 150 basis points or more in one hit. You can understand 25 points which is in line with the size of OCR increases, but 100-plus is truly staggering.

We've been tracking this changes at depositrates.co.nz.

Also when we look behind the scenes we can see banks are very competitively watching each other in their rate setting.

These increases mean that the differential between what a bank is offering compared to a finance company has increased.
Somewhat surprisingly the fin coys aren't reacting with their own hikes in rates.

The other trend has been one where a couple of finance companies, NZ Finance and Instant Finance spring to mind, have secured some wholesale funding lines. These have been done for a couple of reasons, one being the inflows from debenture stock can be lumpy and unpredictable, and the second is that these companies have growth ambitions and wish to fund new products.

Standard and Poor's see this a being good for the sector and suggested this week that further merger and acquisition in the sector will be positive.

My take on all this is that the banks are wanting to protect their market share and muscle in on some of the ground that finance companies have occupied for some years. In some ways this is what is happening in the mortgage space where they are putting, or proposing to put, pressure on brokers who now command around 40% of the market.

The other thought worth exploring at some stage is how deposit taking rates are set relative to risk. It seems risk/reward has little to do with it and competitive pressure rules.

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