ANZ drops rates by 0.27%

ANZ Bank (ASX: ANZ) has trumped its rivals by becoming the first bank to lower rates by more than the Reserve Bank’s (RBA) cut to official cash rates.

The news confirms that Australia’s banks are seeing lower wholesale funding costs. Earlier this week, Australia’s Central Bank cut rates by 0.25% or 25 basis points. ANZ’s competitors Commonwealth Bank (ASX: CBA), National Australia Bank (ASX: NAB) and Westpac Banking Corporation (ASX: WBC) all matched the RBA’s cut.

ANZ’s standard variable home loan rate will fall to 6.13%, equal to National Australia Bank’s, and the lowest rate of the four banks. Commonwealth’s rate is 6.15%, while Westpac’s is 6.26%. ANZ chief executive for Australia, Phil Chronican said, “While competition for deposits remains strong, our overall funding cost has allowed us to reduce the variable rate by 0.27%.”

Borrowers will save around $60 a month or $750 a year on the average loan of $280,000.

With interest rates falling, and economists still expecting at least one more rate cut this year, the banks will be hoping they lead to stronger credit growth. Since the GFC, credit growth has dropped from double digits to low single digits. In the 12 months to March, credit growth fell to 4.4%, its lowest level in the 36 years the RBA has been publishing the figures, while business borrowing was even lower at 1.6%.

Despite the 1.75% in official rate cuts since November 2011 (before this week’s cut), credit growth has struggled to rise. For the banks, such low credit growth means earnings will struggle to grow, and increasing earnings has been mostly driven by cost cutting.

It also means banks have had to increase their payout ratios to increase dividends by more than the level of credit growth, but that’s sustainable for only so long. If the recent rate cut provides a boost to credit growth, then banks should be able to maintain or increase their dividends on the back of rising earnings – and possibly justify their current high valuations.

Foolish takeaway

The news doesn’t auger well for investors with cash in term deposits and savings accounts. We may yet see the banks cut those rates for depositors to compensate for the cut to home loan borrowers. All the more reason to invest in good quality companies paying a decent, sustainable dividend.

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