The Reserve Bank has come to the aid of Westpac (and other banks) once again.
A year ago it was through its normal money market operations by providing liquidity ($45 billion worth of mortgages were accepted for cash by the central bank in the December quarter).
Yesterday it was the bank’s Deputy Governor, Ric Battellino, mounting the sort of argument Westpac and other banks should have been using to argue in favour of the larger rises in interest rates they all have made in the past year.
Westpac has been paying the price of a bungled defence of last week’s 0.45% home loan rate rise. It’s reputation had been shredded.
That continued at its AGM in Melbourne yesterday when Chairman Ted Evans, a former head of Federal Treasury, mounted the podium at the meeting and gave us more of the same commentary
"We absorbed some of the external cost increases, rather than pass them on to borrowers at the expense, of course, of shareholders," chairman Ted Evans said at the bank’s annual general meeting today.
"With interest rates now clearly on the rise again, both at home and abroad, there are limits to how long we could continue to absorb these costs without weakening our bank, the Australian financial system and, hence, the Australian economy.
"We would do no favors to anyone by offering mortgages at rates that we know to be unsustainable."
But it was in the speech in Sydney yesterday by RBA deputy Governor, Ric Battellino, that Westpac’s defence was to be found, and he also highlighted an unexpected bonus, there could be fewer interest rate rises next year as a result of the banks’ apparent gouging.
"We estimate that if banks had not adjusted their lending interest rates to reflect their higher cost of funds over the past couple of years, they would now be incurring losses," Mr Battellino said.
"That would have threatened their ability to keep raising funds and, in turn, their capacity to lend.
"In the event, early in the financial crisis, banks did not pass on all of the increase in their cost of funds, but recently increases in lending rates have run ahead of the cost of funds.
"Banks’ margins are now a little wider than at the start of the crisis, and therefore are adding to profits."
Mr Evans told the meeting it would not be fair for home loan borrowers to pay lower rates while business borrowers faced higher interest charges.
"Nor is it fair to other borrowers, such as small business owners, or even large project developers, to have their interest rates increased so that mortgage rates can be subsidised," he said.
"Nor is it fair to those who save to have deposit rates held down so that mortgage borrowers can be subsidised."
Well, so what. Westpac has been charging business higher interest charges for years because their failure and arrears rates are always higher than for home loans.
Home loan arrears and write-offs have been much lower than for business and as a result home mortgages cost less to banks in terms of using up capital.
Mr Evans admitted that poor business lending and company failures had led to the rise in bad debts in the year to September 30.
"As is clear from the chart, revenue growth was strong, up 13 per cent, reflecting good markets income and increased share in key lending and deposit products.
"Expense growth was held to 5 per cent.
"This, combined with the strong revenue growth, resulted in further improvements in efficiency: our expense to income ratio fell to just 40.2 per cent, a record low both for us and for the Australian banking sector.
"Offsetting that excellent performance was a material rise in impairment charges, or bad debts, which increased by over $2 billion.
"I would like to discuss this a little further because I know it is an area of concern to many shareholders.
"Around one fifth of the increase in impairment charges was directly linked to the Global Financial Crisis in that it emerged from a small number of large companies whose business models did not stand up under the pressures of the circumstances.
"But those cases were limited in number.
"The majority of our losses over the year can be traced back to the deterioration in economic conditions in both Australia and New Zealand – two segments of note were mid-sized Commercial customers, and property development.
"Importantly, the consumer sector has continued to perform very well."
So relatively speaking, consumers have proven to be the better risk, and have helped the bank survive the GFC and some dud business lending.
Home lending is growing, business lending isn’t.
This has coincided with Westpac and the other big three banks getting into a slugfest for customer deposits, offering 6%-8% for term deposits of varying maturities, which is the major reason for the larger than 0.25% rate rises from Westpac, the CBA and the ANZ.
The banks have been forced into the slugfest because they have been told to get more stable customer deposits onto their balance sheets because they are more reliable than the easy way Westpac and other banks took to funding their businesses, by borrowing in local and international wholesale markets, for as little as three or six months.
There was no mention by Mr Evans about how Westpac boosted its profit margins during the year by 0.31%.
That this happened in the toughest year since the last recession for the
