Advance Puts Squeeze On Lenders

Sydney Morning Herald

Thursday October 27, 1994

By JAMES WALKER

Sydney-based Advance Bank has applied the screws to other home lenders, especially other regional institutions, by absorbing all of the latest rise in official interest rates.

But the move - leaving Advance's premier variable rate at 9.5 per cent -could cost the bank about 5 per cent of its net yearly profit if it were forced to suffer the interest rate margin squeeze for three months.

However, Advance hopes the squeeze on margins, which allows it to offer a rate equal or at a slight discount to that offered by the four major banks, can be reduced by raising rates on fixed home loans and retaining or growing its portfolio.

The senior manager of public affairs at Advance, Mr David Brown, said the move was a strategic one, "showing our determination to be competitive in an important market".

"What (the strategists) have done this week is put different options through the modeller.

"Fixed rates will be reviewed in the short term, and they will move, and because of that we are happy to stick with the current variable rate," Mr Brown said.

Commonwealth Bank of Australia and National Australia Bank responded to the 1 percentage point rise in rates by hiking their rates by 0.8 of a percentage point to 9.55 per cent. ANZ, Westpac Banking Corporation and many of the regional institutions' rates are at 9.5 per cent, but have not yet been adjusted for the latest rise.

Advance's business rates have also remained stable while fixed rates are likely to be increased during the next two weeks.

Mr Brown said the bank would not raise its home mortgage rates in the"medium term", or at least until the current round of interest rate rises and speculation had come to an end.

Banking analysts said the decision to hold off on the rate rise could cost Advance about $31 million a year in pre-tax earnings, or a net $20 million.

Even if the current rate were held for three months until the expected next rise in official rates, the move could cost Advance 4.54 per cent of its 1994-95 profit.

Mr Brown said: "That is an analyst's scenario, we are confident what we are doing is viable."

Advance said there had been an easing of demand for housing finance, but that this had been the experience across the industry.

The Reserve Bank increased official cash rates by 1 percentage point on Monday, saying policy settings must be forward looking, "and with the earlier slack in the economy now being wound back and employment growing strongly, pressures on prices and wages are expected to intensify".

© 1994 Sydney Morning Herald

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