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Westpac Strongly Defends “Excessive” Rate Hike
Australian banking major Westpac once again moved to quell criticism from its surprise 45 basis point rate hike, defending its decision yet again by saying lenders having to absorb higher funding costs would result in a weaker financial system.
On Wednesday, the Australian central bank lent its backing to the embattled lender, saying it understood the reasoning behind Westpac’s decision which has attracted harsh criticism from even the Prime Minister.
The Reserve Bank of Australia added however that it did not believe banks would be justified in making such decisions in the future.
Westpac says it has long procrastinated on passing on some of its increased funding costs to borrowers, however it says that the decision was justified because it would be unfair to hold down the cost of mortgage borrowing at the expense of business borrowers, depositors and ultimately its shareholders.
On Wednesday the lender held its annual general meeting with chairman Ted Evans outlining the bank’s prospects for the future, saying it was well positioned despite credit impairment charges that impacted profits greatly last financial year.
“With interest rates now clearly on the rise again, both at home and abroad, there are limits to how long we could continue to absorb these costs without weakening our bank, the Australian financial system and, hence, the Australian economy. We absorbed some of the external cost increases, rather than pass them on to borrowers at the expense, of course, of shareholders.” Mr Evans told the meeting in Melbourne.
At the beginning of December, the Sydney based lender raised its standard variable mortgage rate by 45 basis points, a move which almost double the 25 basis point increase in official interest rates conducted by the central bank.
The unilateral move drew sharp criticism which was magnified after the bank’s main rivals all opted for smaller increases.
RBA deputy governor Ric Battellino lent some support on Wednesday saying he was unsurprised by Westpac’s decision given the rate of loan growth.
“The situation facing Westpac is that it’s increased its loans at virtually double the rate of the other banks and it’s pretty clear to a bank that that is not sustainable. So in some ways I am not surprised they raised their rates by more than the other banks because they would be looking to some extent to price themselves away from the market to rebalance their market share.” Mr. Battellino said.
However, Mr Battellino also said there was less justification for banks to raise their rates beyond any future RBA’s increases because the economy was improving.
“In a competitive banking sector, we should see margins level out soon,” he said.
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