All four major banks are expected to hike their lending rates despite the scrutiny of the royal commission and an ACCC investigation into mortgage pricing by the big four.
Westpac yesterday surprised the market by announcing a 14-basis point increase to all of its variable mortgages. The hike will go into effect on 19 September. The major bank said the decision to reprice its home loans was driven largely by a rise in wholesale funding costs.
“This is a tough decision, but we have a responsibility to price our mortgage products in a way that reflects the reality of our funding costs,” Westpac’s George Frazis said.
“Wholesale funding is an important component in our mortgage pricing. In particular, the bank bill swap rate, which is a key wholesale funding rate for mortgages, increased by about 25 basis points between February and March this year and has remained elevated.”
Last week the bank reported that its net interest margin (NIM) had contracted by 11 basis points over the June quarter to 2.06 per cent from 2.17 per cent in the first half of FY18, primarily due to a sharp increase in funding costs during the first few months of this calendar year.
Morningstar analyst David Ellis recently noted that Westpac estimates a five basis point movement in short-term wholesale funding costs, known as bank bill swap rates, or BBSW, impacts NIMs by approximately one basis point.
“During the third quarter, average BBSW rates were 2.02 per cent, about 24 basis points higher than the first-half fiscal 2018 average of 1.78 per cent,” he said.
“Higher average BBSW rates reduced the bank’s margins by five basis points.”
Following Westpac’s announcement, Citi analyst highlighted that the Aussie dollar fell by almost half a cent to 0.7301 and the three-year bond yield fell to 1.99 per cent temporarily, the lowest level since December last.
“Other major banks are likely to re-price home loans by a similar magnitude,” the group reported.
“History shows that once one of the major banks moves, the others follow in fairly quick succession. Our expectation for such behaviour is despite the attention focused on the banking sector from the royal commission into banking misconduct.
Citi is now anticipating that household financial conditions will tighten. With the major banks holding just under 75 per cent of all system wide mortgages, a similar move by the remaining majors mean that most Australian households with mortgages would experience an interest rate increase.
“The cost of servicing an average mortgage of $300,000 would increase by around $35 per month. Our economy wide measure of financial conditions would tighten by 0.1pp under such an outcome. This change is small but financial conditions are already on the tight side of neutral and consistent with real GDP growth of around 2.5 per cent,” Citi explained.
However, the bank did flag a few caveats. One being that the other major banks may not choose to re-price both the front and back mortgage books.
“Recent interest rate increases from the smaller banks were on the back books. Front books were untouched reflecting the need to increase flows given they were previously growing below system wide rates.
“We could also see strategic rate cuts from some banks.”
CBA-owned Bankwest announced on Wednesday a cut of between 14 and 20 bps for new owner-occupier principal and interest loans depending on the amount borrowed.
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