ANZ’s Struggle: ANZ Cuts Deposit Rates by up to 25 basis Points

ANZ’s Struggle: ANZ Cuts Deposit Rates by up to 25 basis Points

Big Banks Defy Treasurer Frydenberg

ANZ and Westpac Passed on Partial Interest Rate Cut

In anticipation of the Reserve Bank of Australia’s (RBA) move to cut the official cash rate, ANZ reduced its term deposit rates by up to 25 basis points the same day it passed on 18 basis points cut in variable mortgage rates.

Prior to the cut, ANZ slashed seven of its term deposit rates by 25 basis points including 15 basis points cut for 60-month term deposits, and 25 basis points cut for one- and three-month term deposits. The bank blamed the reduced rates on the falling money market bond yields. This rate cut was already decided earlier, and the effective date had coincided with the official cash rate cut.

RBA’s cash rate cut

Governor Lowe acknowledged that many Australians, particularly those that rely on savings income, would be “disappointed with the outcome”. However, speaking for the greater good of the country, the central bank believed the lower interest rates would “help the economy as a whole” and would be “best for the overall economy.”

Following the announcement from the RBA, Governor Philip Lowe expected the banks to pass on the 25 basis points cut to the mortgage loan rates. While ANZ was the first of the big banks to update its home loan rates, the bank reduced the rates by 0.18%, failing to pass on the full rate cut. Treasurer Josh Frydenberg criticised “the banks were putting profits before people” following the Royal Commission and that “actions like this don’t give the Australian people any comfort that the banks have changed their behaviour.”

It was 2016 when the RBA had last reduced the interest rate. At that time, the federal bank announced a 25 basis points drop in the cash rate. All the big banks did not pass the rate cut in full and as a result, the big four banks pocketed over $3.5 billion in revenue.

The implication of a rate cut

ANZ Group Executive, Australia Retail & Commercial, Mark Hand considered “a number of factors, such as business performance, market conditions and the impact on our customers, including our depositors.” The decision was made to “balance the increased cost of managing our business with our desire to provide customers with the most competitive lending and deposit rates possible”.

However, the timing of the move raised concerns over the bank’s financial prospect. An analyst said the RBA’s recommendation to pass on the 25 basis points cut would increase pressure on net interest margins and return on equity for the banks. Thus, the decision to withhold 7 basis points indicated the “cost of managing ANZ’s business in Australia.”

Backfired plan

The expense of failing to cut 0.25% in mortgage rates will result in market share losses. ANZ attempted to attract savers and retirees who rely on interest income by increasing its 11-month term deposit rate to 2.35%, an 80 basis point increase. The decision came after the bank announced a reduction on mortgage loan rates. Mr Hand said the decision was to “get the balance right to provide a highly competitive rate for savers.” However, ANZ’s attempt may be futile, considering the bank had previously slashed several of its term deposit rates in the past week.

Many have speculated that ANZ already had decided to pass on 18 basis points and the bank’s immediate response to the RBA cuts was to signal its struggling position to other banks and hopefully, for other banks to follow suit. However, the leader of the big banks by market capitalisation, CBA, had clear intention to meet the RBA’s expectation by passing on the full rate cut.

As the dominant bank, CBA is able to absorb the negative impact of a 25 basis points cut. NAB showed no resistance and followed CBA’s lead to pass on the rate cut. While Westpac retained 5 basis points in its standard variable rate, it offered a bonus 35 basis point cut for customers with interest-only repayments. Regardless, both banks were criticised by Treasurer Frydenberg and Governor Lowe. Governor Lowe encouraged customers to “shop around” and “look for a better deal somewhere else.”

In relation to the reputation, banks have been among the worst performers, receiving 35,000 complaints in six months and 5,900 complaints a month. ANZ had received 1,400 complaints since the Australian Financial Complaints Authority (AFCA) was established in late 2018. Despite ANZ having the smallest number of customers compared to other big banks, it attracted the largest number of complaints. While ANZ has about 8 million customers, NAB has around 9 million customers and received around 550 complaints. In light of this, customers will consider switching banks.

Pessimistic economy

In the wake of the international trade disputes and the banking misconduct scrutiny, the ever-mounting pressure on the Australian banks will squeeze every last drop of profit they have left. However, only the resilient banks will be able to survive through the current crisis.

By Jack Lee

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