Bank moves to return balance to interest rate pricing

Following a material increase in funding costs over the last six months, Bendigo Bank has announced it will increase its residential variable home loan by 0.15% p.a. to 7.45% p.a.

The announcement was made by Bendigo and Adelaide Bank Managing Director, Mike Hirst, following the Bank’s regular pricing committee meeting.

Mr Hirst said the current banking margins are not sustainable and adjustments to interest rates must be made.

"This is not a popular move, we know that, but it is the right thing to do to restore a proper balance between depositors, borrowers, the Bank’s shareholders and our community partners. At current funding cost levels that balance is out," he said.

Independent assessments by UBS¹ show that banks are making no money on new mortgages written in the current funding environment. Our internal modelling supports this analysis.

"It gives banks no incentive to freely lend to borrowers, as we are not covering the risks we’re taking or investment in operations and people we’re making," said Mr Hirst.

"Banks are currently subsidising mortgages and if you look at the traditional role of a bank this makes no sense and is unsustainable.

"Banks were formed as a means to share wealth. Banks accept cash from people with surplus money (depositors) and lend to people who lack cash (borrowers), but who can add value to it once obtained by building a house or investing in a business and generating growth in the economy. It is critical that this flow of credit continues.

Mr Hirst said banks have a fundamental choice to make: adjust the pricing on loans or restrict lending. He added the latter option would have significant implications for the economy and would not be the right thing to do at this point in time.

"Our Bank must return to a pricing position which is sustainable. In doing that we must, of course, remain competitive while reflecting our unique value proposition. This approach has always seen us win new business and meet the needs of customers in the communities in which we operate."

"Our people deliver industry-leading customer service and our Community Bank^® network strengthens the communities in which they operate in by reinvesting profits they make (more than $60 million since it was established in 1998)."

Mr Hirst said finding the right rates balance meant all of the Bank’s stakeholders would continue to benefit from the flow of funds in their communities.

"Our staff are playing their part. Many have taken unpaid leave to help reduce costs, the Bank is not hiring new back office staff and we are only supporting initiatives which generate significant benefits for our customers.

"Last year, we also adjusted the margin share with our Community Bank^® partners, to ensure the franchise network operates within a balanced and fair pricing model, and our own shareholders have played their part in dealing with the changes wrought by the GFC through periods of reduced dividend payments.

"We therefore think it is important that adjustments are made in our lending rates to equitably balance the position of all stakeholders."

Mr Hirst said not every customer makes a purchase based on price alone. Many look for service, quality and a business that gives back to the people it serves-not just takes from them.

"Bendigo and Adelaide Bank employs more than 5800 people, we take our role as an employer very seriously and we don’t want to take a short-term view.

"We are committed to taking a 100-year view of our business. We value our people and appreciate the efforts they make to serve our 1.5 million customers and the wider Australian community, so retaining this capacity to effectively serve our customers is important.

"Given the current environment, we have to make difficult choices right across the business, finding the right balance between reducing costs, increasing revenue and playing our role in building communities," Mr Hirst said.

Rate change overview:

• Residential variable home loan increased by 0.15% p.a. to 7.45% p.a.
• The new rates will apply from 21 February 2012.

Customers with an average variable home loan of $250,000 will see their repayments increase by approximately $24 per month (principal and interest loan). This follows the 0.50% reduction in the variable home loan rate ($81 per month for a $250,000 mortgage) through rate decreases in November and December last year.

^{1 Australian Banking Sector Update, UBS Investment Research, 3 February 2012.}