What effect will bank mergers have on borrowers?

Michael Veitch - Senior Analyst
August 2008

For those who keep up to date with the press, you would all be aware of the proposed merger between Westpac and St George banks. There has also been a lot of speculation as to whether or not Bankwest is for sale, and if so, who will buy it. The same degree of speculation is around as to possible carve ups on Suncorp Metway’s banking and insurance business’s.

To borrowers, these takeovers or possible takeovers will have the potential to significantly change the lending environment, as in the last 3 years, both St George and Bankwest have sought to aggressively grow market share of commercial property lending.

Whilst Westpac has promised to retain the St George brand, this was the same promise made when they took over Challenge Bank (WA) and Bank of Melbourne (VIC) – both brands no longer exist! Clients who were operating in the 1980’s will also remember the effects of when Westpac assumed 100% ownership of AGC.

We could spend a lot of time speculating on what might or might not happen with this corporate activity; however this newsletter is devoted to discussing what effects banking mergers will have on borrowers.

When one bank takes over another, there is always a period of adjustment, however the following actions generally always happen:

A common set of lending policies will apply, which could mean the terms of how you have borrowed in the past will no longer apply
All bank loans are subject to annual review. A review of your facilities will occur from a new set of eyes who may make decisions about your business, without ever understanding your business.
If you have borrowings with both banks, your exposures will be aggregated. This could affect your ability to borrow more money, or it could affect your terms.
There will be numerous staff changes as people resign, are made redundant, or change departments. This means the people you have been dealing with are no longer on your accounts.
The management of both banks are distracted from what should be the essential job of client management.

So it is clear, if you have borrowings with a Bank that is being taken over, there is not only a strong chance it will affect you, but also a strong chance the effect will be negative.

There are ways to protect yourself from this. The main way is to diversify your funding sources. This does not just mean having loans with two different banks, it means splitting your borrowings between lending sources such as banks, mortgage trusts, debenture lenders and even private lenders.

There are advantages and disadvantages with all sources of funding, and Balmain Commercial is in a unique position through its market radar to accurately advise borrowers of current market pricing and more importantly, likely terms and conditions. These advantages and disadvantages are constantly changing, particularly in the current volatile market.

The big advantage with mortgage trust lenders is that there is no annual review clause - this means when you have a 3 or 5 year term, those terms are set in stone and cannot be varied. Your margin cannot be changed, your reference rate cannot be changed, the lender cannot decide they no longer like your property.

This isn’t a bank bashing exercise – banks are an important source of funding and they offer a great range of products. But they act collectivel., Most recently, all banks were targeting pubs, aged care, professional services and construction. 10 years ago they were all closing their branches together. Now they are all embracing a relationship strategy. When one of the bank’s stop lending, and every cycle this does happen, the others will follow.

Balmain’s value proposition to our clients, continues to be our market radar. As a company that handles $4B in new loans each year, our company is in an excellent position to advise current market pricing and LVR’s, along with other important terms and conditions.

How can a bank increase your lending margin?

For those borrowers who have variable rate loans, everyone is aware that the interest may rise and fall, roughly in line with the changes to the official cash rate. So how else can your interest rate change?

If your interest rate is based on a product rate eg. the Westpac Business Loan Rate or the ANZ Commercial Lending Rate, your interest can be changed at the Bank’s discretion. This is what has happened to millions of home loan customers in Australia when various lenders increased interest rates over and above the official rises in the cash rate.

If your interest rate is based on a margin over a bank advised bill rate, such as a 1.5% margin over the CBA 30 day bank bill rate, you need to remember that this reference rate is actually different to the true bank bill rate (referred to as BBSY – Bid). The difference between the two rates is known as a treasury margin, and this is not documented in your loan contract. This treasury margin can be increased by the lender at their discretion.

How do you protect yourself – ask your lender to document their loans on a margin over the BBSY – Bid bank bill rate, and get them to commit to the margin for the term of the facility (irrespective of annual review). This would make their loan similar to how a property trust loan would be documented.

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balmain + commercial + publications + august 2008

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