ANZ A Wildcard As It Leads Pack
On Tuesday, leak-proof bunkers were set up to house four senior banking teams. They are, in effect, war rooms where interest rate battle strategies are hatched and various scenarios are accessed and tested. Two are in Melbourne – ANZ and National Australia Bank – and the other two in Sydney’s CBD are occupied by teams from Commonwealth Bank and Westpac
The participants comprise the heavyweights of each business, its chief executive, finance director, the head of the retail operations, treasury, marketing and corporate affairs. The pressure is intense. Each team watches every piece of media coverage – newsflashes, the online updates and reads newspaper commentary. They listen to every utterance from the government – the impromptu press conferences known in the media trade as door stops. But they watch their competitors’ moves even more closely.
When the RBA announced a 25 basis point cut to its cash rate at 2.30pm on Tuesday the clock started ticking.
The top dogs in finance and treasury have the task of assessing how much it will cost their bank to pass on the full rate cut and how much they can save by shaving a couple of percentage points off a full cut. In order to play this game of chicken they must also understand how much financial pain/gain will be sustained by the other three. Inside the bunkers, the marketing and retail services operatives must overlay the financial outcomes against the government backlash, PR fallout and the possibility of customer leakage.
None of the banks wanted to pass on the full 25 basis points, but none wanted to be the first to do so. There is no first mover advantage in this game. It might be unpopular to agree with the banks on this issue, but thanks to the state of offshore credit markets the banks’ cost of borrowing has gone up. If they needed to wade into these wholesale markets tomorrow it would be expensive. The scenarios worked through by these war cabinets would have involved a matrix of possibilities. They even debate whether it should be a Sydney or a Melbourne bank that moves first.
But all understand that to the extent they would fall short of matching the Reserve Bank it would be better to do so as a pack. Hunting in formation would minimise customer fallout and provide a better PR excuse. One could use the analogy of the bear in the woods – you don’t need to run faster than the bear, just faster than the guy next to you. Yesterday at 12.30 ANZ became the first breakaway – it announced a cut of the full 25 basis points. It was always prepared to pass on the full rate cut, but was hoping if the others didn’t, it could follow in the slipstream.
But with the ANZ announcement came an unexpected kicker: in future it will not respond to changes in the Reserve Bank’s cash rate but change its variable interest rates on its own timetable, the second Friday of each month. And, more importantly, the movement will reflect changes to its own cost of funds. This decoupling is all about convincing consumers that the bank’s cost of borrowing has little to do with the benchmark rate set by the Reserve Bank. In doing so, ANZ will be less tied to central bank settings and is more likely to move rates up next month if European debt markets remain in a parlous state. It’s a clever strategy, albeit probably unpopular. It is also a game-changer. Most consumers will not understand the significance of ANZ moving away from the Reserve Bank’s rate agenda. They will just see a 25-basis-point rate cut as a win. But the breakaway is sufficiently radical and unexpected that the rest will need to reform their strategies. The ANZ action was not included in the competitors’ list of scenarios.
It was meant to play out differently. The consensus among the finance industry was that NAB was the weakest link. It has been growing mortgage and business lending faster than the others, adding less profitable loans. As a result it was under more funding pressure and less able to sustain the financial pain of passing on the full rate cut. There was an expectation it would pass on less than the full Reserve Bank cut and the others would fall in behind – cutting by more than the NAB but less than the central bank. So NAB would wear the pain and the rest would hide behind the biggest culprit.
NAB would have been desperate to see the others pass on less than 25 basis points, providing it with the excuse to stay with the pack. But nothing this week has gone to script. Within hours of ANZ’s move NAB followed, passing on the full 25 basis points.
NAB described it as difficult decision. Despite being under more funding pressure than the others it was also committed to break from the others’ marketing strategies.
”This has been a difficult decision, where we have had to weigh the concerns of our customers and the community with the rising cost of funds,” NAB said. ”While we continue to be concerned about uncertainty in Europe and the impact on increased funding costs, our view is that it is important to put money back in the hands of our customers and assist with supporting the Australian economy this Christmas.”
If this was NAB’s main concern, it would have announced its rate cut on Tuesday. Once ANZ made the cut, it had no choice but to do the same or lose the marketing claim that it was better and cheaper than the others. It is now a fair bet that the others will fall into line. A new pack has formed and to stay outside it would be dangerous. As one chief executive told me this week, it is not worth bearing the public and political pain of not passing on less than the full rate cut.
By TheAge 9.12.2011