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Pressure on banks to raise rates
The Australian 12:00am January 14, 2019
David Rogers
Pressure is growing on Australia’s major banks to wind back new mortgage discounts and push through further out-of-cycle increases to lending rates in response to higher funding costs.
Last week’s home loan rate rises by Bank of Queensland could trigger a new round of increases despite a still record-low official cash rate set by the Reserve Bank, analysts warned. At the same time a run-up in global funding costs could increase the chance of an official rate cut later this year.
“Another blowout in bank funding costs is adding to the pressure for an RBA rate cut,” said Shane Oliver, head of investment strategy and chief economist at AMP Capital.
“This is bad news for households seeing falling house prices.”
In recent months, the difference in yield between three-month bank bills and the expected RBA cash rate has risen to 57 basis points versus an average of 23 basis points since 2010.
“As a result, some banks have started raising their variable mortgage rates again,” Dr Oliver said.
The RBA is expected to lower its economic growth forecasts in its Statement on Monetary Policy next month following the fastest house price falls since the global financial crisis and a global economic slowdown that slammed the US sharemarket last month.
In analysis conducted for The Australian, mortgage lending tracker RateCity noted banks were sitting on their hands when it came to investor lending, with no major bank cutting interest-only lending rates since the bank regulator APRA removed its cap on January 1.
The cap, which restricted interest-only home loans to 30 per cent of new lending, was introduced in early 2017 to cool the housing market. The removal was forecast to put downward pressure on rates as banks sought to generate new business.
While BoQ’s latest rate hikes should lift its all-important net interest margin and increase its earnings per share by about 3.5 per cent, several “headwinds” could consume most of this benefit, according to Morgan Stanley’s Andrei Stadnik.
BoQ cited “continuing funding cost pressures” as one reason for its rate hikes, and on that score Mr Stadnik noted the bank bill swap to overnight index swap spread had widened by about 15 basis points since BoQ’s result in October, equal to a 2-3 basis points headwind to its net interest margin.
BoQ also cited “intense competition for term deposits” — forcing it to increase deposit rates. A 10 basis point increase lowers net interest margin by about 4 basis points, according to Mr Stadnik.
In his view, BoQ’s higher standard variable rate pricing will lower its mortgage growth unless other banks follow suit, but that is not out of the question without relief from the RBA.
Goldman Sachs analyst Andrew Lyons noted that every 10 basis point rise in the BBSW-OIS spread adversely affected bank sector net interest margin by about 1 basis point and that the current spread of 57 basis points is about 7 basis points above the average of the June half-year. “In recent months we have seen tightening global liquidity drive up the cost of term funding and CBA in recent days raised five-year term funding at 113 basis points over swap benchmarks, which compares to equivalent money being raised at 75 basis points 12 months ago,” Mr Lyons said.
“Assuming term funding portfolios’ average duration of five years, every 25 basis points widening of spreads would lower major bank 2019 financial year earnings per share by about 1 per cent.”
He noted that bank deposit rates fell on average in the December half, with further falls last month amid lower demand for funding because of slower growth in mortgages.
But coupled with higher bank bill rates, this saw deposit spreads “expand meaningfully”.
“The question of how long this can continue is a difficult one to answer,” Mr Lyons said.
“However, we do note that during the current rate-cutting cycle, overnight (official cash) rates have fallen by 3 per cent versus major bank average deposit rates, which have fallen by 2.8 per cent.”
While Citi has a positive view of the banks this year because their share price valuations are “approaching GFC-levels and appear overdone”, the pressure on their net interest margins is the “largest risk” to their share price outlook, according to Citi analyst Brendon Sproules.
He warns of increasing competition for mortgages, the end of back-book mortgage pricing after the ACCC review, the divergence of central bank rates, and rising offshore long-term funding costs.
And while APRA recently scrapped its previous cap on interest-only loans, Mr Sproules expects the major banks to “remain more risk-averse with respect to their responsible lending obligations as well as interest-only lending amid falling house prices”.
This is expected to see a continued shift in the mix of loans.