Australia’s big four banks may not be as comfortable with a proposed ban on mortgage exit fees as they are letting on, a Treasury official says.
Under the federal government’s proposed reforms to improve banking competition, exit fees on new standard variable home loans would be banned from July 1 this year.
Many small players in the banking sector have expressed concern about the financial impacts of the proposed ban.
Often criticised for not fronting up to the public, Australia’s bank bosses have been almost inescapable in one of the industry’s biggest weeks in recent memory.
Bashed by Canberra, the media and their customers, senior executives of the big four banks got a chance to retaliate.
Three of the four chief executives – NAB’s Cameron Clyne, Commonwealth’s Ralph Norris and ANZ’s Mike Smith – fronted a Senate committee inquiry into banking competition.
In the same week, Westpac, NAB and ANZ held their annual general meetings.
Bankers say the three-year outlook for the local industry will be dominated by competition for deposits and funding worries after the financial crisis made customers more frugal.
The effect of higher funding costs on banks and their customers was top-of-mind for bankers from Citigroup, National Australia Bank (NAB), credit union MECU and GE Capital when they addressed a luncheon in Melbourne.
Asked for their three-year projection for the banking landscape, they said it will be tougher, more competitive and dominated by funding concerns and a continued fight for deposits.
MECU chief financial officer and general manager Damien Walsh hopes the mutual’s funding lines will settle down in the years ahead.
By Jill Fraser for Lending Central
Ratings agency Standard & Poor’s says our top four banks are in good nick but cautions that the sector is not immune from risks.
Australia’s Big Four are among a scant few banks in the world that carry S&P’s ‘AA’ rating.
The ratings agency believes that Australia’s sound medium-term economic outlook will support the sector and that the banks will generally maintain solid earnings, which should keep risk appetites in check and at conservative levels.
The downside scenario (which it admits is less likely) would see banks troubled by unexpected developments such as: a sudden downturn in commodity exports and the consequent affect on the economy; a sharp fall in domestic housing prices; or global liquidity pressures in the financial markets echoing those of late 2008 and early 2009.
Australia’s major banks have emerged from the global financial crisis in good shape but future profit growth is under pressure from tighter margins and global economic uncertainty.
As three of the four major banks reported first half profits this week, their dominant themes were fewer bad debts, a rise in retail lending and expectations of a pick up in business lending.
Westpac Banking Corporation posted a 30 per cent rise in cash earnings to $2.983 billion, while ANZ Banking Group Ltd reported cash earnings more than doubled to $2.376 billion.
National Australia Bank Ltd posted the weakest first half earnings among the big four banks, with cash earnings growth of 8.2 per cent to $2.193 billion.
Commonwealth Bank of Australia reports its third quarter financial results next week.
The major banks aren’t passing on official interest rate increases to customers with deposit accounts.
They have also reduced interest payments, even though the Reserve Bank of Australia (RBA) has raised rates.
The big four banks have trumpeted their decision to cap rate rises on their standard variable home loan rates at a quarter of a percentage point – matching the RBA’s April decision.
But when it comes to deposit accounts, customers are being short changed.
ANZ, NAB, Westpac and the Commonwealth Bank have, so far, failed to pass on increases in the cash rate to existing savings accounts with more than $5000 in them.
The global financial crisis (GFC) may not have blocked the flow of credit to consumers and businesses, but it has left banks scrambling for new ways to fund their loan books as credit demand picks up in 2010.
The big banks recently told investors in Hong Kong that although business credit in Australia was weak, overall credit demand would rise as domestic economic growth gathered pace.
While National Australia Bank’s chief executive Cameron Clyne questioned the current level of real housing demand, Westpac’s chief executive Gail Kelly said mortgage lending would continue to grow “at a reasonable level” in 2010.
Australian banks were able to raise more than $160 billion on international markets through the federal government’s wholesale funding guarantee, Treasurer Wayne Swan says.
Mr Swan on Sunday announced that the wholesale funding guarantee, along with the guarantee for deposits over $1 million, would end on March 31.
The Financial Claims Scheme, which is a free guarantee for deposits up to $1 million, will continue until October 2011 and provide certainty for 16 million Australians over their bank deposits.
Mr Swan told parliament in a ministerial statement on Monday that the wholesale funding guarantee had been central to Australia’s response to the global crisis.
“It gave our banks continued access to global capital markets on competitive terms, allowing them to raise more than $160 million,” he said.
Australia’s big four banks say they will hold standard variable home loan rates steady after the central bank shone the spotlight on bank mortgage rates as a major reason for leaving the cash rate unchanged.
The Reserve Bank of Australia (RBA) left the official interest rate unchanged at 3.75 per cent on Tuesday, surprising most economists, who had predicted a 25 basis point hike to four per cent.
RBA governor Glenn Stevens noted in his first statement for 2010 that last year’s out of cycle interest rate rises by some banks was a reason for leaving the cash rate steady in February.
“Lenders have generally raised rates a little more than the cash rate over recent months and most loan rates have risen by close to a percentage point,” governor Glenn Stevens said.
“Since information about the early impact of those changes is still limited, the Board judged it appropriate to hold a steady setting of monetary policy for the time being.”
The federal opposition is being irresponsible by proposing to break up big banks to boost competition, the government says.
Opposition finance spokesman Barnaby Joyce says the concentration of banking interests has put banks in a position where they can raise interest rates by as much as they wish.
Westpac lifted its mortgage rates by 0.45 of a percentage point, almost twice the 25-basis-points rise in official rates handed down by the Reserve Bank of Australia last week.
Senator Joyce says divestiture laws could be introduced that would allow the government to break up merged banks if they abuse their market position.
Deputy Prime Minister Julia Gillard says Senator Joyce’s suggestion is irresponsible.
Consumers can expect banks to continue breaking ranks from the interest rate decisions of the Reserve Bank of Australia (RBA), according to a leading mortgage broker.
The RBA this week boosted the official cash rate by 0.25 per cent to 3.75 per cent but Westpac, the Commonwealth Bank and ANZ all hoisted their standard variable rates higher than the central bank’s increase.
Loan Market Group Chief Operating Officer Dean Rushton said the unwelcome trend of banks breaking ranks from the RBA was likely to carry on during 2010.
“Major banks no longer seem to be moving in line with the RBA, which is a development of great concern to mortgage holders,” Mr Rushton said.
“Based on this development, it is imperative that the RBA now pause and assess the impact of its three consecutive rates rises.
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.
Australia’s major banks are set to retain their double-A long-term credit ratings despite a sharp rise in credit exposures for the two biggest banks during 2008/09.
Global ratings agency Standard & Poor’s (S&P) said the long-term credit ratings of Australia’s major banks will not change in light of the agency’s new framework for assessing capital adequacy.
S&P’s survey of 45 large international banks included Australia’s big four banks and found the average risk-adjusted capital (RAC) score to be more than three per cent lower than the average tier 1 capital ratio.
Capital adequacy levels reflect whether banks have enough funds to cover their credit exposures.
Prime Minister Kevin Rudd wishes retail banks would cut interest rates as quickly as they raise them in response to official cash rate moves.
The Reserve Bank of Australia (RBA) raised the cash rate by 25 basis points on Tuesday, its second consecutive monthly increase.
ANZ Bank matched the increase on its standard variable mortgage rate within minutes of the RBA decision, and the other major banks soon followed suit.
“I do note a contrast between, shall I say, the speed which interest rates are brought down on the part of the commercial banks and the speed with which they are put up,” Mr Rudd told Fairfax Radio Network on Wednesday.
All eyes will be on asset quality, margins and surplus capital as signs that the bad debt cycle has peaked and margins are set to expand as interest rates rise, when the big banks begin to report their annual results this week.
All of Australia’s big banks are now cashed-up with strong balance sheets after a raft of capital raisings over the last 12 months.
The raisings were in reaction to escalating bad debts, losses from toxic conduit assets and funding pressures in the wake of tight credit markets.
While analysts differ over whether bad debts will peak in the September 2009 half or in early 2010, all point to surplus capital that may be returned to shareholders during 2009/10 if a large bad debt buffer is no longer needed.