Westpac’s rate rise spotlights big four’s growing pricing power
Westpac Banking Corporation has hiked its standard variable lending rate by almost double the amount of the central bank’s increase, shining a spotlight on the burgeoning pricing power of the major banks.
Australia’s second biggest home loan lender on Tuesday delivered a bigger than expected interest rate rise, announcing it will increase its standard variable home loan rate by 45 basis points to 6.76 per cent.
After the 45 basis point increase, repayments on a $250,000 mortgage would increase by about $71 a month, Westpac said.
The bank will also raise the interest rate it pays its online savings customers 45 basis points while interest rates on business loans will rise by 25 basis points.
Credit card interest rates will increase by between 25 and 35 basis points, Westpac says.
The rate hikes to home and business loans take effect from Friday December 4.
Westpac’s move came after the Reserve Bank of Australia (RBA) delivered its third official cash rate rise in as many months, lifting the cash rate by 25 basis points to 3.75 per cent.
The RBA’s decision follows a 25 basis point rise in both October and November.
All other major and regional banks left Westpac to take the heat from the expected negative publicity from the bigger than expected rate move, simply saying their rates were under review.
Westpac blamed its larger than expected rate hike on the cost of securing term funding from offshore wholesale markets.
It said this factor and the higher interest rates paid to its depositors had increased the bank’s average funding costs.
Westpac head of retail and business banking Peter Hanlon said the hikes were regrettable.
“However, Westpac has withheld passing on the full amount of the increased funding costs we have experienced to ensure we could continue to support our customers through the economic downturn,” Mr Hanlon said in a statement.
Analysts said Westpac was demonstrating the pricing power that the big four banks received from reduced market competition.
Fat Prophets financial services analyst Colin Whitehead said the structure of the non-bank lending business model had allowed the major banks to gain market share and make bigger than expected interest rate rises.
“I think they feel they are able to put in greater rate rises on the residential mortgage book without any significant impact, whereas they may find they have a detrimental impact by doing the same thing on the corporate side,” Mr Whitehead said.
Credit spreads have eased from the late 2008 crisis levels but remain elevated, making offshore funding sources more expensive than before the global financial crisis, he said.
“But (the banks) are also delivering a turnaround in their net interest margins, so the bottom line is they are benefiting from less competition and profitability is expanding.
“So that does weaken somewhat their arguments that they need to increase rates at a faster pace than the RBA.”
Goldman Sachs JB Were analyst Ben Koo told clients last month the banks had gradually passed through higher funding costs to customers as the credit crisis progressed.
“Retail banking margins will improve as official cash rate rises are passed through,” he said.
Westpac and Commonwealth Bank (CBA) have hoovered up the market share of home loans over the past 12 months, and now have 26.2 per cent and 28.5 per cent of the market respectively when their subsidiaries St George Bank and BankWest are accounted for.
UBS analyst Jonathan Mott told clients on Monday the two big lenders were responsible for driving 80 per cent of total system credit growth across all loan books in the six months to October.
Of the $53 billion in major bank loan growth, Westpac and CBA contributed $42 billion, he said.
The standard variable rates on home loans offered by the major banks currently stands at 6.76 per cent at Westpac, 6.31 per cent at ANZ, and 6.24 per cent at CBA and NAB.
AAP
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Louis December 4, 2009
Hopefully this is a good opportunity for non-banks to call the banks bluff.