Government wins first round of rate battle
Sydney Morning Herald
Thursday October 8, 2009
In the contest between the Federal Government and the big banks it looks like the banks are set to lose this round with all indications that the 25 basis point increase in official interest rates is all that will be passed on to their mortgage customers.As yet none of the four large Australian banks has announced a rate increase but they are expected to do so by the end of the week. And when one moves the others are likely to follow closely and quickly.Despite the likely restraint by lenders to only lift rates in line with the Reserve Bank move, the reality is that they have been desperate to inch rates up beyond that set by the central bank.Had the RBA left rates at the historic low of 3 per cent for another month or two the temptation for the banks to lift rates pre-emptively could have been too strong to resist.But for now they will toe the line and escape the community backlash. It's a safer course of action.The banks have experienced an increase in their overall costs of funding since the start of the global financial crisis and have been attempting almost anything to claw back some of this cost. These lenders are desperate to explain that their cost of funds is not tied to the cash rate set by the RBA thus they don't receive much of a benefit when the cash rate is lowered.It also means that when the cash rate starts to rise again they can pass that on to customers and most of the gain will go directly to bolstering their net interest margins.Another way to boost the interest rate margins is to slug business borrowers and this has been an ongoing feature of the industry since the financial crisis began.And as credit markets continue to settle, the cost of their wholesale borrowings are starting to fall. Six months ago short-term funding costs were tracking between 80 and 100 basis points above averages in recent years, but they have now pulled back to 20 basis points above where they were previously.Longer term funding costs for banks will still track upwards as pre-crisis loans are rolled over at higher rates. However, the large banks remain long-term beneficiaries of the instability of markets because they have managed to increase their combined market share from 67 per cent to 82 per cent over the past two years.On the downside there is pressure on the home loan market. According to Scott Manning at JP Morgan, the outlook for Australian housing volume remains extremely challenged. "At the same time, despite the positive impact from the first-home owner grant, volume growth remains below the long-run trend and we see limited acceleration potential going forward".Based on numbers released by the Bureau of Statistics yesterday the value of home loan approvals appears to have peaked in June and the downward trend continued in July.In part this reflects the fact that the banks have become more disciplined in lending to the eager and less cautious first-home owners whose activity has been supporting the growth in the overall market."Government support in the form of the first-home owners' grant saw growth rates modestly recover to a three-month annualised growth rate of 8 per cent since October 2008. However, we see median loan growth stabilising between 6 and 7 per cent over the course of 2010 and 2011," Manning said.The banks remain fairly comfortable with the quality of their retail lending portfolios and would undoubtedly rather see rates rise which, in the short term, would enhance their profits. It would probably be an acceptable trade-off for a slight weakening in demand.But for all bank executives the memory of the lashing received by the Commonwealth for lifting rates outside an official RBA movement is enough to have them think again.When rates were coming down the banks €“ in a rare display of competitive behaviour €“ each adjusted slightly differently in order to suit their own agendas. The much-maligned CBA increase was only a catch-up to the others but the public relations backlash was severe.It's a fair bet that the CBA will stay in the pack this time around and given its chief executive noted a few days ago that he expected the banks to follow the RBA then it would be unusual if they didn't.Perversely enough the Government's threat to clobber any rate strays will ensure they will return to their comfortable pricing oligopoly.
© 2009 Sydney Morning Herald
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