Rate cuts eroding confidence, bank CEOs warn

Three cuts in official interest rates since June have drained business confidence, according to two top bank chief executives.

Westpac CEO Brian Hartzer speaks during a hearing of the House Economics Committee at Parliament House in Canberra on Friday. Picture: AAP

A succession of three cuts in official interest rates since June has drained business confidence, although signs of life have returned to the housing and residential property construction sectors, according to two of the nation’s top bank chief executives.

Commonwealth Bank boss Matt Comyn and his Westpac counterpart Brian Hartzer told a parliamentary committee they were positive about some areas of the economy, such as unemployment closing in on a decade low and a strong export sector, but business investment and wage growth were stubbornly weak.

“Our view is that each subsequent interest rate cut in relatively quick succession has probably dented some level of consumer and business confidence,” CBA’s Mr Comyn said.

“I certainly understand the rationale behind the Reserve Bank’s moves — low inflation, low income growth and lower confidence — and changes in monetary policy stabilise some aspects of the economic picture.

“But our view is that further rate cuts will not lead to a pick-up in economic activity.”

The assessments of Mr Comyn and Mr Hartzer echo the comments of acting National Australia Bank chief executive Phil Chronican, who said when presenting the bank’s annual result this week that rate cuts were having a “perverse” effect.

Mr Chronican said the overwhelming majority of borrowers didn’t actually cut their repayments and spend, preferring instead to pay off more principal, and depositors such as retirees had to make do with less.

But in a glimmer of better news, the RBA said in its statement on monetary policy on Friday that new forecasts considered at this week’s board meeting implied some progress towards its medium-term inflation and full employment objectives.

While global markets appeared to have passed through a “trough of pessimism”, the central bank said that progress was expected to be only gradual.

It was all too late for the major banks’ profit reporting season, with ultra-low interest rates, strong competition and sagging levels of business confidence causing an 8 per cent slump in cash profit to $27bn for the big four.

Earnings were back at 2012 levels, while the 11 per cent average return on equity has not been seen since the 1990s.

The consensus of analysts was that the outlook was not much better, with eroding profits and margins intensifying pressure to cut dividends and preserve capital ahead of even stricter capital requirements at home and in New Zealand.

Westpac’s Mr Hartzer, who appeared at the house parliamentary committee morning session, said a lack of business confidence was behind the economic malaise.

Instead of lower interest rates, the better policy response was to cut red tape and stimulate expenditure on research and development and plant and equipment.

Mr Hartzer said he supported tax-driven accelerated depreciation allowances.

Asked by the committee about the impact of stricter enforcement of responsible lending standards, the Westpac chief acknowledged that post-royal commission reforms might have encouraged a box-ticking approach, making it harder for small businesses to access credit as bankers were reluctant to make judgment calls about business loans.

This was “inimical” to entrepreneurship.

“The No 1 thing we hear small business customers talk about is the challenge of red tape,” Mr Hartzer said.

Westpac, meanwhile, had started to receive notices from the ACCC in relation to the watchdog’s competition inquiry into the mortgage market.

He predicted the ACCC would find that mortgage pricing was a complex issue, with the mortgage market “very competitive” and non-banks growing at three times the rate of the wider system compared to an average of 0.5 times for the majors.

Westpac was losing share to the non-banks, foreign banks like HSBC, and non-traditional players like Macquarie Group.

Mr Hartzer said many of these players had competitive advantages in funding, tax arrangements and capital requirements.

Asked if he supported a more neutral market, he responded: “I'd support that.”

Both Mr Comyn and Mr Hartzer rejected suggestions that existing mortgage customers were paying a “loyalty tax” because they were slugged with higher interest rates than the offers made to prospective borrowers.

With the ACCC to focus on this practice in its inquiry, Mr Hartzer said businesses in all industries competed hard for new customers.

“It’s a fundamental tenet of a competitive economy,” he said.

Banks wanted to keep their interest margins relatively stable, and the pricing of loans was used as a mechanism to manage supply and demand. “In the long run we want our customers to stay,” the Westpac chief said.

Asked by Greens MP Adam Bandt about CBA’s pledge to exit thermal coal by 2030, Mr Comyn said the bank had a relatively small exposure and was trying to strike the appropriate balance.

He said CBA had signed up to the Paris agreement.