Why are banks raising their interest rates?

Ross Greenwood speaks to the boss of the ANZ (ASX:ANZ), Shayne Elliot, after the bank lifted their rate by 0.16 per cent.

Introduction: Why are banks raising their interest rates?

Ross Greenwood: From one banking issue to another. Let’s now go to the two big banks, the Commonwealth Bank and ANZ today raising their mortgage rates. This follows Westpac last week increasing mortgage borrowing cost by 0.14%. Today, the ANZ indicated it will raise its rates by 0.16%. Less than 20 minutes later, the Commonwealth Bank announced it will raise mortgage rates by 0.15%. This will affect not only those people with residential home loans, but also investors with home loans as well.

The cost for people with a half million dollar mortgage depending on which bank you’re with will be between 560 and 600 dollars a year. One important thing with the ANZ is that it is said that any area where it is drought affected, this cost increase will not impact those people, but of course, where you are drought affected, that’s a big issue because the question is whether all of New South Wales is in drought right now. One man who is being right at the heart of this decision is the Chief Executive of the ANZ bank, Shayne Elliott, who is in the studio with me. Many thanks for your time, Shayne.

Interview with: Shayne Elliot, CEO, ANZ

Shayne Elliott: Thank you for having me.

Ross Greenwood:  All right. This price increase of mortgages, is it inevitable?

Shayne Elliott:  I think it’s inevitable. We’ve got a business to run and we have to take into account a lot of factors when we make this decision. We want to have the best product out there in the market for our customers, but on the other hand, I’ve got to look at my cost. The reality is that the cost of funding the bank has gone up pretty substantially over the last six months. We all had hoped that that would go back to normal and it just hasn’t.

Ross Greenwood:  The one issue that the Royal Commission to me has really brought out is where banks have put their own corporate interest and the shareholders’ interest ahead of the customers’ interest. Now, in this particular case, you have raised the cost of mortgages to all of your customer base. Is this the case where you are putting the shareholders ahead of the customers? Whose interests are coming first here?

Shayne Elliott:  I don’t know that it’s as simple as that. It’s not about who comes first, who’s second, it’s about getting that balance right. We’ve got shareholders, it’s their money at the end of the day in terms of that we’ve got to look after and get a decent return on. We’ve got our depositors. They’re the ones looking for deposit rates. They have a lot of people who rely on it for their income and we’ve got the borrowers. We just got to get that balance right, Ross, and it’s not easy, it’s not a formula. We don’t sit down and rank them or run things through a computer. There’s a lot of judgment that goes into that.

Ross Greenwood:  Let’s go to Philip Lowe, who just two evenings ago, talked about increasing mortgage costs. Here is the Reserve Bank governor giving a speech in Perth just two nights ago.

Philip Lowe: I would note that some banks have increased their mortgage rates recently in response to higher interest rates in wholesale money market. A much less remarked upon fact though is that the average mortgage rate paid in Australia has actually fallen since August last year as most lenders have increased their discounts. I encourage anyone with a mortgage to shop around. There are some very good deals out there at the moment.

Ross Greenwood:  There are some very good deals out there. Yours might not be the best deal in the marketplace, so why should a customer stay with the ANZ if they have a home loan?

Shayne Elliott:  Well, it is a pretty good rate. We’re still lower than many banks. In fact, we’re lower than most at this point. We think it’s a great business, we’ve got alternatives. If you don’t want a standard variable, we can move you onto a great fixed rate at 3.75, so a 3.75% fixed for a couple of years for people who want certainty. We think we’re really competitive, Ross.

Ross Greenwood:  Okay, but that whole issue of shopping around, you and I both know even in this day and age, despite Royal Commissions, despite inquiries, despite government intervention, it’s actually not easy to move a bank, is it?

Shayne Elliott:  Well, I’d like to dispute that actually. It’s actually it’s quite simple, you want to move your– I’ll tell you what, thousands of people do it almost every day. Home loans, actually quite simple. You want to move, go to a broker or walk into a bank. Actually, it’s not that hard at all.

Ross Greenwood:  Then we go back to where Philip Lowe indicated that your wholesale funding costs are rising. One issue that I always wonder right now is monetary policy in Australia. Housing markets are falling. Normally when the housing markets fall, interest rates fall. At the moment, housing markets in major capital cities are falling, banks are raising interest rates. That really doesn’t do anything to encourage a person to buy a home at increasing borrowing costs given the fact that people don’t quite know how much more these borrowing costs might rise.

Shayne Elliott:  Yes, look, I think that’s a fair point. We’re at an interesting time. It’s really different to the experience we’ve had in Australia for probably 20, 30 years, and so there’s a lot of factors at play here. It’s my job and our team is to make sure we’ve got really competitive rates as low as we can while still generating a reasonable return for our shareholders.

You’re absolutely right, house prices are soft. Not everywhere they’re falling, but they’re softer than we’ve been used to. It’s a little bit harder for people out there to get mortgages than it has been in the past and the amount of borrowing they can get is a little bit lower than they’ve had in the past. Yes, there’s lots of factors at play there undoubtedly.

Ross Greenwood:  I know there’s been intervention by regulators, APRA and also this is being inspired to try and take some of the heat out of those property markets to try and limit the amount of interest-only lending there has been and invest that lending in the marketplace. That seems to have been working. Housing markets are cooling. The one thing I’m wondering is the Royal Commission. Everybody is suggesting if this makes it harder for banks to lend, makes them more conservative, that doesn’t necessarily do the economy, the Australian economy much good at all.

Shayne Elliott:  Look, there’s a point to your question and you’re quite right if it gets to that stage. Remember what we’re trying to achieve here through the Royal Commission is to make sure that banks, ANZ included, act responsibly. Well, we want to do the right thing. We want to be responsible. Our job is to make sure that people borrow for the right reason and they borrow an amount that is not going to get them into hardship. That’s our job, being responsible.

I don’t think anybody would question the intent of the Royal Commission. Will it have implications? Certainly, I can tell you one of the implications today. A lot of front-line people who work in banks, they’re nervous. They’re pushing customers through more process, asking more questions, that’s the right thing to do, but people are a little bit more nervous. It’s a little bit harder for people to walk in and get a loan as quickly as they might have in the past. I don’t know if that’s a bad thing.

Ross Greenwood:  Do you believe that that settlement the other day, $35 million with Westpac, now it’s not your bank, I admit that, but $35 million with Westpac sends really a shot across the bow about responsible lending because that was all about people between 2011, 2015 getting loans that they shouldn’t have got. Is that an issue for you as well?

Shayne Elliott:  No. Well, the point about responsible lending is absolutely front and center of the mind. Certainly, at the ANZ, we’re going back when– it is not new, it’s not because of the Westpac settlement because we’ve been looking at that section for a number of years, making sure we’re doing the right thing. Are we really doing a home where it’d harm people’s income? Are we asking all the right questions to know what can that person really afford without getting themselves into harm’s way?

It’s not in our interest to lend money to people who can’t pay it back. Let’s be really clear, which just pretty central alignment of interest here and so say to people, lending money is not that hard, it’s getting it back that’s the more difficult piece and we got to make sure we lend it to the right people.

Ross Greenwood:  That’s the most important thing. Let’s go to the Prime Minister who spoke with Neil Mitchell, my colleague on 3AW earlier this week in regards to banks.

Scott Morrison: Where I failed was to properly understand the real pain people had been feeling about being treated so badly.

Neil Mitchell: Yes, and the banks were so dodgy than you realized, weren’t they?

Scott Morrison : Well, they actually weren’t because that’s why I was taking the actions that I was already taking. What I didn’t do and this is where I do regret, Australians needed to work through the deep hurt they’ve had on this.

Ross Greenwood:  That is the Prime Minister, Scott Morrison, saying there why he opposed a Royal Commission and why now in hindsight, believes he’s wrong. Did Australians need to tell their stories about banks and where they felt they had been failed by our banking system?

Shayne Elliott:  Yes, I do. I understand the need of individuals to feel that they have had their day in court, they have had their day that they have said their story if they’ve been harmed or felt that they’ve been put into difficulty by the banks. I can understand that and I think as a nation, while it’s incredibly painful and it’s confronting and all those things, at the end of the day, this is the right thing to do. We’ll get through it and we’ll be a better financial system as a result. I know that ANZ will be a better bank as a result and I’m sure that the economy and the community overall will be better.

Ross Greenwood:  Shayne Elliott, Chief Executive of the ANZ bank. It’s always great to have a chat.

Shayne Elliott:  Thank you.

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Image source: 2GB

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