Banks likely to 'tough it out'

Wednesday, July 8th 2009, 10:10PM

So, according to the Reserve Bank, we poor borrowers who take out home loans on floating rates are being ripped off.

The central bank, in a paper this week, said the margins on floating rates are too high and they should come down. They are right on that point.

But the question is what can be done to get them down? Some suggest the government should use its bank, Kiwibank, to drive home loan rates lower.

It already has been doing this. Kiwibank had successfully been keeping the big banks honest and leading rates lower in the past. They became so good at it often it would announce rate changes straight after an OCR announcement.

We haven't seen that competitive action this year, and there is good reason for it. It's not to do with a lack of capital as some commentators argue.

Indeed its parent company NZ Post raised $200 million in a subordinated debt issue this year and half of that, under accounting rules, counts as capital.

Rather I would suggest the problem is around service. Our analysis of bank market share shows that Kiwibank has been boxing well above its weight and wrote the majority of the residential home loan business in the December quarter and also did very well in the three months to March 31.

Its mortgage book grew $603.5 million to $7 billion in the March quarter, accounting for 30.5% of all new mortgage lending by registered banks, while its market share at March 31 was just 4.67%.

In the December quarter, Kiwibank's mortgage book grew $869 million and accounted for 89.7% of all new lending by registered banks, excluding the newly registered SBS Bank.

That's a mighty achievement, plus a salient commentary of what other banks are doing - not lending.

Having watched lenders for many years it seems to me New Zealand organisations have never been the sharpest at pricing floating rates.

The Reserve Bank concludes in this report that margins on floating rates are too high.

So what? There doesn't seem to be much point in using this rate at the moment. A far better option, if you want a short term rate, is to pick a six month term.

Westpac is offering six-months at 5.39% compared to its 6.49% floating rate, and Kiwibank is offering 5.45% v 5.99%.

The Westpac rate is fascinating as the spread, at 110 point is huge. I would also suggest that this is showing banks are mispricing floating rates. I can't understand why there is such a big spread between the two rates - surely the cost of funding for the two isn't that different?

You have to wonder if the banks are squirming over all this discussion and analysis over rates and margins.

Probably they are. But they may well decide to "tough it out" as the politicians and the regulators can't make up their minds what to do, and in the end probably won't do anything; and actually can't do anything other than to regulate rates.

But what do you do? The answer is simple. Look at other options. There are locally-owned and funded institutions, like Kiwibank, TSB and PSIS, who offer better rates than the big Australian-owned banks.

*Philip Macalister is the publisher of mortgagerates.co.nz and the NZ Mortgage Magazine.

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