Banks claw back profits

New Zealand's big Australian-owned banks have moved to claw back profitability in the competitive mortgage market by raising floating interest rates faster than the Reserve Bank raises its official cash rate.

After the Reserve Bank's last 25- basis-point interest rate rise this month, ANZ National, BNZ and ASB raised their variable home-lending rates by 30 basis points to 9.55 per cent, David Chaston, publisher of interest.co.nz, said.

That effectively increased the margin between what borrowers paid for their loans and what the banks paid for the money by five points. While not a huge increase, the extra points earned on the registered banks' $21.43 billion in variable lending as at October was significant, said Chaston.

Banks may have viewed what looked like the last Reserve Bank rise for some time as a good time to wring more profitability from loans.

"If you were in this business, you might say, well, if this is the top of cycle and it's going to go down, then this is the time to have a little bit of a tweak of your margins."

Chaston said the banks were following the example of Westpac, which put up its variable rate by 30 points this year. As a result, Westpac had the highest variable rate among the big four banks for some time, but it suffered little apparent loss of market share. That suggested less competition among the banks on variable-rate lending compared with fixed rates, which have been increasingly favoured by homebuyers in recent years.

As at October, total mortgage lending by registered banks was at $109.7 billion, and most of that - $85.49 billion - was on fixed rates.

Banks have said the year-old mortgage war on fixed rates, initiated by the BNZ with its "Unbeatable" campaign, has squeezed the margins they earn on that lending.

Massey University banking studies director David Tripe said: "To some extent, the floating rate payers are getting socked for banks' lack of success in some other areas".

In his quarterly report on banks released yesterday, Tripe said it was likely banks were becoming increasingly concerned about the downward trend in their profitability. A widening of the margin earned on variable-rate lending "would be consistent with an attempt to recover from that".

Tripe also said a key driver of that trend was the battle for market share in residential mortgage lending, "with effective margins being squeezed as the proportion of banks' residential mortgage secured lending that is at fixed rates (and therefore at lower margins) steadily increased".

Tripe's ' estimate was that banks earned a margin of about 1 per cent on fixed-rate lending and about twice that on variable rates.