Mortgage rates set to drop
Banks’ stockpiling of cheap funds points to new record low home loan rates — KPMG
Banks are locking in low interest rates through the bond market, which should allow them to offer more attractive home mortgage rates, consultancy firm KPMG says.
KPMG, in its latest Financial Institutions Performance Survey, noted that the Reserve Bank had taken everyone by surprise when it cut its official cash rate (OCR) cut by 50 basis points on August 7.
Market expectations were for a quarter of a point cut.
The central bank’s move was against the background of dwindling business confidence, which the ANZ bank said had fallen to its lowest point point since the Global Financial Crisis in 2008.
“Unsurprisingly, the sector feeling the worst impact overall was [agriculture], but all sectors had generally low business confidence,” KMPG said.
“With other factors that seem to be present in the local and global economy, such as the US/China trade wars, Brexit, Hong Kong and its unknown resolution, the continued rise of populist leaders and on the local front the coalition Government struggling to show a clear strategy, it does not paint a great picture for the times ahead,” KPMG said.
But with such a low interest rate environment, some of the local banks have shown an interest in locking in low funding costs.
In July, Westpac launched a fiveyear medium-term bond, notionally seeking $100 million, but with unlimited oversubscriptions potentially to be accepted.
Such was the hunger for yield, institutional investors drove the total issuance to $900m, nine times the original amount sought, and at an interest rate of 2.22 per cent.
In August, ASB followed the same song sheet as Westpac, seeking $100m for a five-year bond with unlimited oversubscriptions, and was able to raise $600m.
“However, ASB were able to lock in a rate of 1.83 per cent, a whole 39 basis points lower than Westpac’s rate, obviously benefiting from the surprise double rate cut from the Reserve Bank.
“Being able to lock in such low levels of funding should help fuel the competitive fires ahead of the traditionally active spring mortgage market, with the possibility of further record low mortgage rates being offered,” KMPG said.
KPMG, in its survey for the June quarter, said profit growth for the New Zealand banking sector has all but flat-lined.
Net profit after tax experienced a 0.45 per cent drop to $1448m, in contrast to an increase of 8.98 per cent to $1454m for the quarter prior.
“The stable June quarter is reflective of the general decline in business confidence across the year, the further impact of conduct caution by the bank sector and a general winter slowdown — [but] we can’t expect a record profit every quarter,” John Kensington, KMPG’s head of banking and finance, said. The result was predominantly driven by increases in net interest income ($37m) and non-interest income ($46m), and a drop in impaired asset expense ($22m), offset by large increases in operating expense ($64m) and tax expense ($48m).
Kensington said banks have capitalised on low interest rates, locking in cheap funding for an active spring quarter ahead for mortgages.
“The drop in interest rates was not unexpected, but the quantum caught commentators by surprise and there is a real diverse view of what it means — is it an early stimulus aimed at getting people to borrow for growth or does it signal tougher times ahead and send an implicit message to batten down the hatches a bit?” Kensington said.
Interest rates also continue to dominate speculation at a global level, with inverted yields in US treasuries sending a worrying signal to the market, seen to some as a clear sign of the future for the both the US and the global economy, Kensington said.
“Whether this is a bellwether indicator of tougher times to come, only time will tell.”