Banks offering sharp one-year rates

Weekly Rate Change Report: Banks continue to put pressure on finance company rates in the one year maturity term, but are dropping rates for longer durations.

Monday, 10 September 2007

To illustrate the pressure banks are exerting it is useful to compare ANZ and BNZ's one-year rates with those of two of the bigger (and rated) finance companies, Marac and South Canterbury Finance.

They both increased rates recently and have one-year rates of 9.00% and 9.30% respectively.

One could argue the difference in rate isn't big enough to compensate for the additional risk. After all the two finance companies have Standard and Poor's ratings of BBB- while ANZ and BNZ have AA ratings.

While banks are pushing one year rates up, longer durations are going down, which may be a sign of two things. One is an expectation interest rates will start dropping and also the so-called "flight-to-quality".

As we noted last week investors are turning away from finance companies to banks, therefore banks have no need to offer high rates to attract money.

Amongst the bank cuts were Bank Direct which lowered its three and five year rates 20pts to 7.80%. Its big sister, ASB, also made cuts of the same magnitude in the same maturities. Currently there is no difference between ASB and its subsidiary here.

Other finance companies to increase rates include General Finance which put its six month and one-year rates up 50 and 25 points respectively to 9% and 9.75%. However its flagship rate remains two-years at 10.15%.

Dorchester, which recently won accolades from a Wellington based broker, increased its 12 month rate 50pts, its 18-month rate 60 points, and its 2-year up 15 points.

These changes put its one-year rate at 9.10% with interest paid quarterly and 9.40% for interest at maturity. Its two year rates are 9.20% (quarterly) and 10.00% IAM.

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