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Out-of-cycle rate cuts 'inevitable'

Banks are making bigger profits from writing new mortgages today than at any time since 2004, putting intense pressure on lenders to cut interest rates independently of the Reserve Bank, new research suggests.

With recent earnings results showing strong profit growth from home lending, UBS analysts have predicted pressure from rivals and politicians will unleash "out-of-cycle" mortgage-rate cuts.

UBS bank analyst Jonathan Mott, the report's author, argued that banks were generating 88 basis points of profit on a typical mortgage – equal to 88c a year for every $100 in mortgage debt.

It is the biggest margin since the UBS estimates begin in 2004, and represents a rapid improvement from a year ago when Mr Mott said the banks were probably losing money on new home loans

But with bank share prices surging more than 15 per cent in the past three months, many in the market are wondering whether the growth is sustainable.

Mr Mott wrote that he was concerned the rally was overdone, and the market was not considering that such big profits would inevitably put greater competitive and political pressure on lenders.

"Out-of-cycle rate cuts and renewed competition are now inevitable," the report says.

"If the global economy continues to improve, funding markets keep rallying and deposit competition continues to ease, we believe banks will come under pressure to initiate out-of-cycle rate cuts."

Given this increase in profits, Mr Mott also said there was a real risk of political interference if the banks did not pass a fall in costs on to their customers.

Macquarie's banking analyst, Mike Wiblin, also argued last week that profit growth caused by holding back official rate cuts was not sustainable in an election year.

The rapid turnaround in profits has come from falling wholesale funding costs and the banks' decision to only pass on official rate cuts in part.

At the same time, however, Mr Mott's analysis suggested banks were losing money from term deposits, which they are chasing to new liquidity rules designed to make banks safer.

The nation's biggest lender, the Commonwealth Bank, posted a record $3.78 billion half-year profit this month, underpinned by 13 per cent profit growth in its flagship retail lending business.

ANZ, NAB and Bendigo and Adelaide Bank have also reported wider profit margins from consumer lending.

CommBank's chief executive, Ian Narev, said this month that he expected wholesale funding costs to peak this year, but the bank was still facing competition in the market for deposits.

12 comments so far

  • In February 2012 the CBA made a 0.1% out of cycle rate rise on my mortgage because of rising international funding costs. If conditions improve and that extra 0.1% is no longer warranted then I expect a cut. The alternative the CBA has is losing me as a customer completely when I move to another bank. The choice is theirs.

    Commenter
    Michael
    Location
    Adelaide
    Date and time
    February 25, 2013, 2:31PM
    • Why has the Australian media got a fascination about bashing the banks about interest rates all the time?

      Come on get over it!

      I would as many Australians prefer a sound banking system so we don't end up like the US or most of Europe.
      And now every Australian is depending on their super to continue growing for retirement, if the big 4 go belly up you can kiss goodbye to any retirement lifestyle as the super would reduce by about 50%.

      Better to be carefull in what you are actually whishing for eh?

      Commenter
      Kenny
      Location
      Sydney
      Date and time
      February 25, 2013, 2:38PM
      • Allowing profiteering by jacking up rates does not create "sound banking system" as it sends banks down slippery path of ripping off customers. They supposed to increase their profits by doing more business instead.

        At the moment banks making record profits while doing record low levels of lending, especially for the business.

        They shall be made subject to hefty "super profits" tax.

        Commenter
        dinkumnet
        Location
        dinkumnet.com
        Date and time
        February 25, 2013, 3:28PM
    • Banks cutting rates out of cycle with the RBA would be really nice, but unfortuantely this is from a third party report, the banks themselves are saying something completely different. They even said so themselves about a week ago. As long as the banks have a monopoly in the market they will continue to charge as they see fit.

      Commenter
      Finance broker
      Date and time
      February 25, 2013, 2:57PM
      • Ian Nareev was interviewed last week specifically noting that nominal rates were lower now but given the timing of funding requirements average costs of funding were still higher. If what he says is correct then you would expect the banks get in to a position to logically cut at least in step with the RBA by around the end off the year or this time next year as funding tranches reach term. Of course that is dependent on what people do with their funds since deposits are not growing so much now with lower rates. They are also under pressure from Basel requirements where things like RMBS shoddy loan books are not considered tier 1 capital and rightfully so. The savers deposit is as important as ever for them and they are still likely to make the borrower pay for that safety net in their funding mix in my opinion.

        Commenter
        Alan
        Location
        Sydney
        Date and time
        February 25, 2013, 3:34PM
      • Monopoly would suggest there was only one bank, oligopoly would be the correct term. That being said, there are many options beyond the big four, so this doesn't really apply either...

        Commenter
        FanFan
        Date and time
        February 25, 2013, 3:42PM
    • Make no mistake, the banks will charge as much as market will bear.

      Commenter
      Lunatic Fringe
      Date and time
      February 25, 2013, 3:18PM
      • Don't mortgage rates always just end up wherever the RBA wants them? I'm sure Glenn will let borrowers know if he reckons they're getting too excited, and it's time to come off the emergency lows.

        Commenter
        Matt
        Location
        Sydney
        Date and time
        February 25, 2013, 3:21PM
        • Savers be warned..............you are about to be screwed.

          Commenter
          The Oracle
          Location
          Oberon
          Date and time
          February 25, 2013, 3:34PM
          • It has never been about the savers.

            It has always been to support speculators in housing

            Commenter
            Mr Ponzi
            Date and time
            February 25, 2013, 3:54PM

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