From media reports and the written speech, the strident defence today by Westpac of its offensive 0.45% home loan rate rise two weeks ago resembled the Black Knight of Monty Python fame.

He’s the chap who continued trying to fight as each limb was hacked away, a lot like the defence Westpac mounted at the time of the announcement (basically no one around to comment after a statement was issued), and then the ham-fisted way it was further defended by CEO Gail Kelly and her gang of senior reporters (AKA The Kelly Gang).

This morning, the bank’s chairman and head banana, Ted Evans, a former head of federal Treasury, mounted the podium at the AM in Melbourne and gave us more of the same.

“We absorbed some of the external cost increases, rather than pass them on to borrowers at the expense, of course, of shareholders,”  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.”

When bankers grab hold to the national good to help justify a bad decision, you know (like politicians grabbing onto patriotism) that you are being screwed.

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 year because its failure and arrears rates are always higher than for home loans. It’s a simple cost of funds, which has to cover provisions for bad and doubtful debts and for write-offs of failed debt.

Home loan arrears and write-offs have been much lower than for business, but apparently not in the banana smoothie world that is the upper echelons of Westpac these days.

Home loans have a much lower capital weighting than loans to business, so they are therefore cheaper to make and hold (and cheaper to sell to the Reserve Bank, as Westpac and other banks did a year ago to raise cash after being cut off from overseas for a month).

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%, reflecting good markets income and increased share in key lending and deposit products.

“Expense growth was held to 5%. This, combined with the strong revenue growth, resulted in further improvements in efficiency: our expense to income ratio fell to just 40.2%, 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.

So what Westpac has done is classic banking 101: impose higher cost recovery targets (aka wider spreads via higher rates) on the part of the bank growing the fastest, to generate higher overall revenue and make up for the sluggish business lending.

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.

The bank has been forced into the slugfest because it has been told to get more stable customer deposits onto the 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 3-6 months.

If Westpac and other banks had been catering to customers in the days of easy credit by offering reasonable returns on deposits (instead of 1% to 3% when lending it out at 7%-9% or more), then they might not be in this predicament.

There was no mention by 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 banks says a lot about the immense strength and profitability of the bank.

It doesn’t need to raid the customer bank balances to fatten its profit margins, or pay the bonuses of the likes of Kelly and her all male reporting executive team.

Peter Fray

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