Average Bank Funding Costs Likely To Continue Rising

Post by NeilMc on December 3, 2009 · Under Business News, Company News, banking, home loans, interest rates, mortgages · Comment

The rising average funding costs of Australian banks is likely to continue for at least another couple years sparking controversy that the Big Four will pad out official interest rate increases with excessive adjustments to their own mortgage lending rates.

Some market participants are even going as far to suggest that monetary policy set by the Reserve Bank of Australia would increasingly start to take its cue from interest rate decisions made by the Big Four banks.

The Australian quoted an unnamed banker as saying:”At some stage, the RBA won’t raise rates by as much, because the banks themselves will be doing more of the heavy lifting. But that could mean that the peak cash rate will be lower.”

On Tuesday, Westpac controversially lifted its variable mortgage rate by 45 basis points, or 20 basis points in excess of the increase in official interest rates enacted by the central bank.

Westpac’s decision attracted intense criticism from Treasurer Wayne Swan, and the lender defended its action by saying its average funding costs have continued to rise.

Westpac says it has been forced to refinance its term debt at much more expensive rates that it now uses a larger percentage of costlier long term debt as part of its funding mix, and that interest rates on retail deposits had continued to surge.

Westpac’s Big Four rivals all face similar challenges and going forward the theme of rising average funding costs will most likely continue for at least another 2-3 years without any large scale reversals in the term funding market.

Investment bank Goldman Sachs JBWere estimates that for every 20 basis point funding spread increase in Westpac’s mortgage book, the lenders earnings would increase by between 5-7 per cent.

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