Australian banking major ANZ has come out in strong defence of its interest rate policy, after raising them higher than the official rate hike. The lender says it needed to pass on higher funding costs in order to maintain its profitability.
ANZ made its case in a submission to the Senate inquiry investigating competition within the banking industry, and was more vociferous that its rivals in defending its super sized rate hikes which it began implementing in 2008.
“Had we not passed through these cost increases, the rate of return on the capital employed in that area of ANZ’s business would have fallen to levels unacceptable to the investors who provide us with capital, and a rational outcome would be reduced lending or credit rationing. Indeed, had we not passed on any of these increases, the mortgage portfolio would have been operating at a loss.” ANZ said.
ANZ says its net interest margins will continue to face pressure for the next year and a half as it rolls over funding raised prior to the financial crisis, in to debt priced at the current more expensive rate.
ANZ rejected criticism that its strategy of expanding into riskier Asian markets, as it seeks to transform into a super regional lender posed a risk to financial stability in the country.
ANZ argued that its strategy of diversification did the opposite, and its presence across 14 Asian economies mitigated risk. The lender pointed to higher savings rates in Asian countries which provided a new source of funding for the bank during a period when the overall environment for fund raising remains costly as a consequence of the financial crisis.
ANZ added that its international businesses were required to comply with Australian prudential standards.
In defending its position, ANZ said that whilst industry absolute profit numbers were indeed large, they did not represent an excessive return on equity. Justifying its position further the lender cited the common argument made by all the big four lenders, that it had not required government bailout money during the crisis.
According to ANZ, its use of the wholesale funding guarantee meant that it paid $2.1 billion in fees to the government so far, a figure that is expected to grow to $5.5 billion by the time all the sovereign guaranteed debt it issued matures by 2015.
ANZ made its argument ahead of the release of government proposals for banking reforms, which are expected any day now.
The reform proposals are designed to increase the level of competition within the Australian banking industry, a sector where the big four banking groups control 75 per cent of the market.
ANZ says it would back any proposal for the government to support the securitisation market, proposals which would allow lenders to issue covered bonds (bonds backed by high quality mortgages), and any proposal designed to increase the number of funding options available to banks.
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