St George will stay in step with the RBA

St George's approach to setting variable home loan interest rates will be to stay in step with changes in the official cash rate, the bank's acting chief executive Paul Fegan said yesterday.

Fegan's statement was the most unequivocal yet made by a big bank CEO about rate-setting policy. St George will not consider changes to variable mortgage rates apart from responding to moves by the Reserve Bank.

Like the other big banks, St George is absorbing higher funding costs in the hope that it will be the beneficiary of any flight to quality. Fegan said the bank had seen an increase in new mortgage customer numbers but it was not material.

The bank's net interest margin fell 10 basis points from 2.11 to 2.10 per cent in the year to September. The bank's funding mix accounted for four basis points of that move.

St George's general manager external reporting, Elvio Bechelli, said that over the past six months the differential between the overnight cash rate and the 90 day bank bill swap rate had widened from 15 basis points to 35.

Bechelli said a one basis point increase in the spread sustained for a year would add $2 million of extra funding cost for the group. Mitigating that was an increased spread on deposits (St George has had a big increase in deposits into transaction accounts), the widening of corporate borrowing rates and some lessening in competitive pressure.

Bechelli said St George had a well diversified funding base. More than a third of wholesale funding is in the form of term funding; only two per cent of that funding is due to mature in the next six months.

The bank's $108 billion of assets are funded by $47.8 billion of retail deposits, $13.9 billion of long term wholesale funding, $25.2 billion of short term wholesale funding, $18.9 billion of securitised assets, $1.9 billion of subordinated debt and $300 million of reference shares.

St George is one of the big issuers of mortgage backed securities in the Australian banking market. Fegan was quick to dispel any suggestion that the bank's funding strategy was at risk because of the lack of liquidity in that market. He said $18.9 billion of securitised assets out of a $108 billion loan book represented adequate diversification.