ANZ becomes fourth bank to raise mortgage rates

ANZ has raised the rate of its standard home loans by 18 basis points to 5.56 per cent.

Earlier on Friday, NAB lifted its variable mortgage rate by 17 basis points to 5.6 per cent.

It follows Westpac raising by 20 basis points last week, and Commonwealth on Thursday raising its Standard Variable Rate (SVR) by 15 basis points.

ANZ chief executive Australia Mark Whelan said the 18-basis-point increase would add $36 per month to the average home loan of $242,000.

Both ANZ and NAB blamed market conditions as well as regulatory changes which require the major trading banks to increase the amount of capital they hold against their home loan portfolios.

NAB’s head of personal banking, Gavin Slater, said the decision was not easy, but was the right decision for the long term.

“We know we have to balance the interests of our customers with the needs of our more than 550,000 shareholders,” Mr Slater said in a statement to the ASX.

“Regulatory changes on capital requirements also increase the costs associated with providing home loans.”

NAB’s raised interest rate on all new and existing variable home loans will be effective from Thursday, November 12.

In May, the NAB tapped shareholders for $5.5 billion in capital raising to boost its regulatory buffer to new levels that bank regulator Australian Prudential Regulation Authority (APRA) has demanded be “unquestionably strong”.

APRA appears to support the banks in this goal, so blame APRA as much as the banks.
Publisher of Banking Day, Ian Rogers

While the banks do not release details of the expected impact of the changes to their balance sheets and profitability, Macquarie Wealth Management has forecast a 15-basis-point rise in SVR home loans would boost cash profits for the “big four” by 3 to 4 per cent.

For the NAB, which is expected to announce a cash profit of $7.6 billion next week, that would mean a earnings uplift of around $270 million, while ANZ would increase its earnings by $229 million.

Macquarie said Westpac’s 20-basis-point move would increase its full-year profit by $326 million, while the CBA ? the most profitable bank ? could expect a $390 million benefit from its repricing.

Publisher of the respected industry newsletter Banking Day, Ian Rogers, said the banks were like any big business and out to maximise their profits.

“In the case of Australia’s large banks, they are a well-established oligopoly and all four members of the oligopoly know how the mechanics of pricing work,” Mr Rogers said.

“Each bank usually takes its turn to take the lead on pricing changes, confident the others will follow.

“In this instance, the industry has a clear cut rationale to lift home loan interest rates independent of the Reserve Bank, thanks to APRA’s directive to raise additional capital.”

Mr Rogers noted the banks were also motivated by their desire to pay increased levels of dividend each half-year.

“APRA appears to support the banks in this goal, so blame APRA as much as the banks,” Mr Rogers said.

Big banks will require even more capital

In a note to clients, Deutsche Bank sais the out-of-cycle rate rises may not have finished as even more onerous requirements are likely to flow through from the next generation of “Basel 4” global regulations.

“To the extent that Basel 4 imposes even higher capital requirements on mortgages, we expect to see further repricing,” Deutsche Bank said.

UBS analyst Jonathan Mott said the big banks would still need $14 billion of additional capital to be “unquestionably strong” over the next two to three years.

However, Mr Mott argued borrowers may be spared if the banks raised the capital “organically” ? that is by earnings growth and retained profits ? and through dividend reinvestment programs, funded by shareholders.

Regional banks may be the winners

The big winners out of the round of out-of-cycle rate rises are likely to be the regional banks.

The smaller regionals were not obliged to raise more capital as they were already required to hold higher levels due to the far higher risk-weightings on their mortgage books.

In a sense, APRA is forcing the big banks up to the regionals’ level of risk on what are pretty well the same mortgage books.

Deutsche Bank’s Andrew Triggs said the regionals would see the greatest benefit from mortgage repricing, with cash profits estimated to increase by 6 to 7 per cent from a 15-basis-point mortgage increase.

“That said we see a strong possibility that the regionals will reprice by a lesser amount, in order to boost market share while still improving returns,” Mr Triggs said.

“However, even if Bank of Queensland and Bendigo and the Adelaide Bank were to reprice by only 10 basis points, we estimate cash profits would increase by around 4 per cent, and any further repricing for Basel 4 represents further upside.”

Source: ABC News