What I'd do with rates if I was ANZ's CEO...

The RBA helpfully published the latest major bank net interest margins (NIMs) in its Statement of Monetary Policy, which, I should note, I have only glanced at reluctantly (more on this later). What stands out is that ANZ has the widest margin between the cost of its funding and the price of its products. This is not news in and of itself--it has been the case for several years.

So what will ANZ do when it makes its now controversial independent interest rate decision on the second Friday of the month? On the two previous occasions it unilaterally jacked-up rates (in February and April), ANZ only increased them by six basis points. Following the April increase, its standard variable rate loan was actually on par with CBA's, but higher than NAB's.

We know its overall NIMs are much wider than CBA's (see the chart below), although this probably reflects more corporate lending and relatively greater offshore banking exposures. Thus the wider NIM also compensates it for taking on higher risk.

ANZ has copped flak for its attempts to decouple from the RBA, and by waiting until this Friday it will likely be the last bank not to pass on the full 50 basis point cut. There is a subtle margin play here. By not announcing its rate decisions until the second Friday of the month, and then delaying, typically, the actual change in its rates another week (ie, the change does not normally take effect for another 7 days), ANZ can benefit from lower short-term funding costs while waiting as long as possible to reduce its product prices. That is, it can lock-in wider margins for longer.

If I was ANZ I would want to win back some PR points after the beatings I have copped following the February and April announcements. So, I would pass on more than any other major bank--probably around 41-43 basis points if I had to pick a number. A 42 basis point pass-through would give me a one basis point lower SVR loan than CBA, which enables me to argue that I am the second cheapest major.

Because it has passed on more of the RBA's cut than any other major, this should, in principle, be quite positive for the brand. And it will be the last bank to report doing so. The beauty for ANZ is that it can then chisel back a few basis points of margin if it needs to over the coming months based on its independent pricing model. Assuming unchanged RBA rates, I would make these variations so small as to not warrant material media attention (eg, a basis point or two here and there). But, collectively, they mean a great deal to ANZ's bottom-line...