St George tests Swan's resolve

"It would be a brave banking boss who would want to sit side-by-side with St George at the top lending rate."

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Scott Murdoch

July 6, 2008

It would have been an interesting phone call to the Treasurer's office in Canberra today, as St George executives told them the interest rate floodgates could be about to open again.

With offical interest rates on hold and despite the money markets calming somewhat from the peak of a few month ago, St George has put its variable lending rate up by a hefty 20 basis points.

Wayne Swan may have been correct in thinking he had the banks under control after three rounds of rate hikes from the retail banks independent of the moves by the Reserve Bank. Talk of fresh hikes has been quiet since April.

The cycle kicked off in January when NAB led the pack by raising its standard variable rate by 12 basis points, in a breakaway move from official policy moves, and all of the majors then reacted with abandon.

Swan, at first, was weak. His initial reaction was to virtually endorse the moves by the banks by citing the commercial reasons for the hikes.

For customers, the response was as strong as being flogged with wet bread.

As the banks then embarked on the third round of independent rate hikes, the Treasurer got tough. There is now legislation being drafted to make it easier for customers to switch banks.

Finally there was a strong reaction that should have put the banks on notice - the government and the Treasurer would not be pushed around.

Now St George is testing that resolve. Its move today put the fifth largest bank at the top of the lending market among the majors with a variable rate of 9.67%.

The top four are now positioned between 9.44% at the CBA and 9.47% at the ANZ and Westpac.

The St George action comes at a time when the Westpac takeover deal is not looking as attractive as it once was after a massive drop in the Westpac share price of more than 25% and while delicate regulatory negotiatons are underway.

A team of St George executives met with Swan and his two key advisers last week in his Canberra office to brief on the deal's progress.

Swan will not be happy with this 20 basis point increase. It was a hike of the same size by ANZ in the first round that prompted him to seek meetings with his Treasury and Reserve Bank confidantes, which advised, at that time, that increases of 12 to 15 basis points were necessary.

The hike today means St George's variable lending rate is now 110 basis points higher than it was in January. Of that increase, 60bp is from independent moves while 50bp is courtesy of the RBA's February and March increases.

In its defence, St George said the cost of wholesale funding still remains expensive and the money markets are its main source of cash.

However, the 90-day bill rate has been on the way down. It is trading now at 7.76%, down from the peak of 8.11% where it was in March.

The credit crunch has undoubtedly made the cost of funding more expensive. In February last year, the bill rate was 6.34% - almost identical to the official cash rate at the time.

But it is difficult for St George to justify this decision.

Official interest rates are on hold for the foreseeable future and it was this bank that trumped it was ever-so-clever during its results presentation in building its retail deposit base from $15.8 billion to $24.8 billion.

The banking industry's focus will now turn to whether any of the majors follow suit, given St George has set the precedent for round four of independent rate moves.

The CBA, during the last round, took the sit in a bid to gain some market share from ANZ.

It would be a brave banking boss who would want to sit side-by-side with St George at the top lending rate.

smurdoch@fairfax.com.au

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