Why Westpac boss is worried about deposit rates

Westpac boss David McLean is worried about deposit rates. Photo/Supplied.

A cut in the official cash rate this week could leave "some room" for home loan rates to fall further but the bigger worry is what to do about deposit rates, says Westpac boss David McLean.

Home loan rates have fallen to record lows in recent months with both the BNZ and ASB banks last month offering sub-4 per cent rates for a three year fixed term - the first time three year rates have fallen so low.

The Reserve Bank of New Zealand is due to give a monetary policy update on Wednesday afternoon with some economists predicting there could be a cut which would send the rate from 1.75 per cent to a new record low of 1.5 per cent.

McLean said he expected a "flurry of activity" to follow if the rate was cut but most lending was based on swap rates where a cut had already been built in.

"There is some room [for mortgage rates to fall]. The problem we strike is how low can deposits go?"

McLean said a lot of people lived off the interest they earned on their deposits and if banks lowered the rates on them it may drive people to seek out a better return through riskier investments.

That posed a problem for banks which needed depositors to fund their loan books.

"We are caught by this need of depositors to have a reasonable deposit rate," he said.

The average rate for a six month term deposit was 3.26 per cent in March down from 3.28 per cent a year earlier, according to Reserve Bank figures.

Holding the rate for deposits could also put the squeeze on bank margins, McLean said.

Westpac New Zealand's half year result to March 31 shows the bank has already been under margin pressure with its net interest margin slipping one basis point to 2.23 per cent.

The bank reported a 7 per cent rise in its cash earnings to $515 million excluding its gain from the sale of Paymark for the six months to March 31.

Including the sale of its 25 per cent stake in Paymark, Westpac 's profit rose 15 per cent to $555 million.

McLean said excluding the Paymark sale, which netted it $40 million, the result was similar to the last half.

Net loans at the bank rose 4 per cent to $92.1 billion while mortgages were up 4 per cent to $49.6b although its home loan lending only rose 1 per cent from the end of September.

McLean said it had grown at a slower rate than the market's 2.5 per cent growth over the last six months after making an active decision to step out of the "intense competition" being seen.

"We are selectively choosing where to compete."

McLean expected the home loan market to grow at 4 to 5 per cent for the full year and said Westpac would definitely be back in the market in the second half of its financial year.

Business lending had been very strong and its book grew at 5 per cent to $30.9b.

"Even though GDP is growing under 3 per cent business activity is still pretty strong."

With the capital gains tax off the table McLean said the bank was "pretty confident" about future growth excluding unpredictable factors like US president Donald Trump starting a trade war with China.