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Banks in precarious position on rates


Chris Zappone

After two decades of funding ever-increasing home loans, Australia's banks have reached crunch time.

With the Reserve Bank leaving official rates on hold yesterday - amid demand for loans waning and overseas funding cost rising - the banks may be forced to lift rates independently to claw back profits.

The choice is a tough one: lift their interest rates and they'll hurt the economy, leaving consumers even more reluctant to take out loans.

Keep mortgage rates where they are, amid the rising cost pressures, and their own pockets will take the hit.

The banks were already warning in the weeks before yesterday's Reserve Bank announcement - the cash rate was left at 4.25 per cent - that they may begin setting their interest rates independently.

Bankers have argued that a healthy banking sector has helped steer Australia clear of the bailouts and recessions seen in the US, UK and Europe since 2008 when the financial crisis first emerged. Australia's big four banks recorded profits of $24.3 billion last year.

However, Bell Potter Securities analyst TS  Lim said that at this point the banks would not risk lifting rates independently  of the RBA because it would put more strain on borrowers, and an already patchy domestic economy.

“Every time you raise rates at a time when unemployment could tick up, especially on the white collar side of things, you're going to put unnecessary stress on the mortgage book,” Mr Lim said.

He described the balance between banks' margins and households' ability to pay as “precarious.”

RBS Equities banking analyst John Buonaccorsi said any bank deciding to lift interest rates now would be entering uncharted territory.

 “There seems to be a view they need to claw back some points,” he said. “The easiest way to do that is to when the RBA cuts just claw back less.” Without the opportunity provided by an RBA rate change, he said banks were unlikely to lift rates on their own .

The decision by ANZ and Bendigo Bank to announce rate changes outside the RBA's monthly meeting has also contributed to household uncertainty over mortgage rates.

ANZ Bank refused to offer guidance on its February mortgage rate decision after the Reserve Bank surprised the market by keeping the cash rate on hold yesterday.

“We said we would review our interest rates on the second Friday of every month,” an ANZ spokesman said. “Until that time, we don't speculate on the future movements of our interest rates.”

The ANZ is set to make its statement early-to-mid Friday afternoon.

Bendigo and Adelaide Bank said the process of banks following the RBA's decisions with their own announcement “doesn't work.”

“The reality is that a bank's cost of funding has a tenuous relationship to the cash rate and it's an accident of history that a relationship exists at all,” said the bank's managing director Mike Hirst.

“Our bank hasn't worked through the mechanics yet, but we are looking to provide our customers with a greater understanding of how the price of their loans and deposits are set.”

The impasse over mortgage rates comes as the outlook for the jobs market grows less certain. Even with the jobless rate at a low 5.2 per cent, a slew of layoffs have been announced at Westpac, Holden and Toyota, as demand for loans and vehicles falters.


  • Why do the average Australians hate their own successful 4 big banks so much?
    Maybe it's only because they are so brainwashed by the bank bashing media or even worse politicians?
    But I wish they could UNDERSTAND and then decide what do they really want to happen in their life, not only just nonsense complaining?
    1). If our 4 big banks to not make profits, and then go bankrupt and forces our country to end up like the PIGS in Europe with unemployment of over 20% and house prices crashing up to 50%?
    2). Since the 4 big banks make up half of the ASX stock market, they maybe want 50% of their super savings to vanish and then face a poverty line lifestyle in their own future retirements?
    AUSTRALIANS please learn to love our very own World beating AA+ rated banks as they saved your own bacon in the ravishing sub prime. And will look after your retirement savings in super or even better as one of the 100's of thousands of direct shareholders & self funded retirees receiving a fully franked TAX FRRE dividend flow over your lifetime.
    Borrowers think of long term life gain in retirement for only some short term pain now!

    Common sense
    Date and time
    February 08, 2012, 11:20AM
    • Excuse me but haven't they made enough profit in a year!

      Date and time
      February 08, 2012, 11:21AM
      • The banks are a disgrace. They make so much money and they claim the cost of funding from overseas is "hurting" their profits. Someone answer me this: what was happening 5 years ago? 10 years ago? what will happen in 5 more years? 10 more years? If they continue to be allowed to be a law unto themselves, we have no control over what they do to us. We will be shafted completely - but it will never change - because deregulating the industry in the 80s was a one way street - there's no coming back from there. If we try to control them, they will sue and say that we are interfering in their business. And they'll be right.

        Surry Hills
        Date and time
        February 08, 2012, 11:31AM
        • Come on ANZ, you have said funding had increased. If there was any truth in it, you would increase your interest rate comes Friday.............. Perhaps, you will be the Robinhood of Feb 2012, rob the rich and give it to the poor by leaving interest rate unchange for another month...........

          Be Brave
          Date and time
          February 08, 2012, 11:35AM
          • uBank uSaver is paying savers 6.01% interest, while uHomeloan is charging 6.14%. How much tighter can it get?

            Imagine if McDonalds charged $6.14 for a BigMac meal when it costs them $6.01 to make it. And we all know a Big Mac meal doesn't cost anywhere close to $6 so such margins will never ever happen anywhere else in business.

            ... guess what google found ...
            Date and time
            February 08, 2012, 11:40AM
            • The sooner an Asian bank sets up business in Aus offering 3 or 4% mortgage rates the better for borrowers.
              I know for a fact that a Japanese bank is trying to set up in Aus use Japanese funds to lend at lower rates than oz banks.
              Aus borrowers are ripped off compared to US and Asian banks.

              Date and time
              February 08, 2012, 12:16PM
              • The banks have been living it up for years and now they are getting the downside - Twitter:@bankcustomers

                Date and time
                February 08, 2012, 12:31PM
                • Personally, I do not understand why Oz bank borrowing costs have increased. Has anyone investigated the reality or otherwise of the situation. Knowing banks lack of morality I'm sure they'd be overstating the real situation as much as they can.

                  I would have though the Oz banks relative safe haven situation would have meant borrowing costs are actually lower. You'd think there would be more prepared to supply to our les risky banks, particularly as our savings rate has improved.

                  Hopefully they are not passing on increase in borrowing costs for their overseas companies to the Oz market.

                  I wonder how much we'd have to borrow from overseas if our property market never got into bubble territory - which could have been stopped by making lending practices realistic.

                  Occupy Cronyist Governments
                  Date and time
                  February 08, 2012, 12:36PM
                  • Sounds fine if you ignore the details....yes, the jpy banks are awash with cheap jpy retail deposits, but they wouldnt be allow by their reglator to offer aud mortgages in any volume they are then just perfecting a carry trade, so they either hedge or raise aud to match the aud loans...both scenarios result in rates around bbsw + margin and nowhere near 3-4%.

                    Date and time
                    February 08, 2012, 12:42PM
                    • Enough Profit ? Stop looking just at the $. Look at the ROA & it will show about 1%. If this can't be maintained then they are going backwards. Is that what the yappermaticks want ?

                      Date and time
                      February 08, 2012, 12:44PM

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