money-au.com.au » interest rates

Australian Banks Need To Raise Rates Out Of Synch With Central Bank

Sharat — Wed, 08 Sep 2010 06:02:49 +0000

A leading investment bank says that Australian lenders should raise their mortgage lending rate before the year is out, and need to do so independently of the interest rate cycle of the central bank.

This would soften the impact of rising funding costs, according to UBS analysts.

Australian lenders consistently cite the higher cost of funding on wholesale credit markets, as hurting their profitability.

Three of the four major lenders have not hiked their mortgage lending rates in excess of the RBA since December, when politicians began accusing them of being greedy.

“They potentially should look at increasing mortgage rates outside the RBA between now and Christmas,” head of investment strategy and consulting at UBS’s Australian wealth-management business, George Boubouras, said yesterday.

“That would be a prudent thing to do, from a shareholder perspective.”

Mr. Boubouras added that the lenders needed to raise their mortgage lending rates beyond the pace set by the central bank to maintain profitability and their margins.

Recently CBA in a presentation said that its funding costs have increased by 122 basis points since the global financial crisis, largely as a result of increased funding costs and higher deposit rates.

According to the RBA, domestic banks rely on offshore and local bond sales for 28 per cent and 19 per cent, respectively, of their total funding.

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Westpac Delivers Strong Results

Sharat — Tue, 24 Aug 2010 05:33:22 +0000

Gail Kelly, chief executive of Australian banking major Westpac is the latest banking chief to warn that the sector faces significant revenue head winds, that will slow their growth in earnings.

Westpac, which reported earnings on Monday, posted a $1.4 billion underlying net profit for the quarter ending June, representing a leap of 27 per cent.

The lender, like its peers, benefited from a sharp decline in provisions for bad and doubtful debt, but despite its success, the Sydney based bank followed the larger trend that has emerged amongst its peers, with revenues, and net interest margins under siege.

Westpac’s quarterly revenue fell by 1 per cent, with net interest margins falling by two basis points as a result of higher funding costs, and volatility in financial markets.
“This has been a solid quarter and I’m happy with the way that we are dealing with a challenging environment,” Mrs Kelly said.

Mrs. Kelly joined the chorus of banking chiefs issuing her own warning that there is fresh pressure on revenue as a result of more expensive funding costs, and intense competition for retail deposits.

“We have had a few revenue headwinds — the whole sector has seen some of them flow through. The first one was the reduction in exception fees, but that was a headwind dealt with at the start of 2010. But there are going to be further revenue headwinds as the average cost of funds goes up — there’s a number of moving parts.” Mrs. Kelly said.

The Westpac chief said the declines in revenue may intensify the lower lending and credit growth outlook.

During the quarter, Westpac increased lending to Australian households and small businesses by an additional $7 billion, whilst increasing its deposit base by $4 billion.

Mrs. Kelly added that the lender has experienced a sharp rise in the number of customers taking advantage of the lenders online deposit accounts, instead of traditional term deposits. Mrs. Kelly said that competition between the major lender remained intense.

“There are always waves of particular intensity around pricing,” she said. “We saw a wave of intensity at the start of the calendar year, then it waned mid-year and now it’s starting to pick up. The online pricing out there is very, very competitive and that creates a negative impact for us.”

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ANZ Chief Issues Stark Warning On Interest Rates

Sharat — Mon, 23 Aug 2010 05:14:48 +0000

Mike Smith, chief executive of Australian banking major ANZ has issued a stark warning, suggesting that world’s bank will be forced to alter their business model in response to the “permanently” higher cost of banking.

Mr. Smith issued the warning whilst unveiling the latest set of ANZ results last week. ANZ’s third quarter underlying profits leapt 37 per cent.

Despite the great performance, Mr. Smith added a note of caution, saying that the costs of wholesale funding were now a permanent feature of banking a result of the global financial crisis.

“We have to face up to the fact that banks now have permanently higher costs of doing business, these include continuing pressures on wholesale funding costs and at the same time rates for deposits have never been higher compared to short-term wholesale rates. We also have to carry significant costs associated with the new international capital and liquidity requirements. The result is we simply to have think differently about our business. We need to change, we need to streamline our structures and do things in new and different ways.” he said.

Mr. Smith’s comments immediately started speculation that Australian lenders would raise their interest rates once the results of the election became clear.
ANZ’s warning followed similar comments from NAB and CBA, both of whom say that debt that have issued which is about to mature will have to be rolled over with more expensive current funding.

Analysts believe that lenders would increasingly try to shift the burden of higher funding costs on to their customers, by increasing mortgage and consumer lending rates, as well as increasing interest rates on business loans.

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CBA Widely Expected To Raise Interest Rates Independently

Sharat — Fri, 13 Aug 2010 05:44:24 +0000

Australian banking major, CBA may become the first lender to raise its interest rates independently of the Reserve Bank of Australia.

In justifying its decision, the lender said that its net interest margin was under pressure from higher costs.

CBA, which this week reported the highest ever profits for an Australian bank was downgraded by many analysts after its $5.66 billion half year net profit was dissected by financial markets.

UBS downgraded the rating on CBA from a buy to neutral, while cuts to the earnings forecasts for the next two years were made by up to 4 per cent.

Speculation has also grown that the Australia’s largest lender by market capitalisation would be the first bank to raise its interest rates out of synch with that of the Australian central bank.

It is unlikely that any of Australia’s lenders will make any changes to interest rates prior to the Federal election which is scheduled to take place on August 21st.

Ralph Norris CBA’s chief executive says that the lenders cost of funding an average mortgage is likely to increase by at least 40 basis points over the next year, which in turn would increase the pressure on the lenders profit margin.

The pressure intensified in the second half of CBA’s previous financial years when margins fell from 2.18 to 2.08 per cent primarily because of higher funding costs and retail deposit rates.

Craig Williams, banking analyst with Citigroup Financial Markets says that whilst a rate hike not in synch with the central bank would be unpopular with the public, he believes that the lenders with the largest mortgage portfolios would feel the most pressure to raise rates as their margins were squeezed.

Westpac has a $250 billion mortgage book, including St George, while CBA’s is worth about $290 billion.

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CBA Chief Refuses To Rule Out Independent Interest Rate Hikes

Sharat — Wed, 11 Aug 2010 05:50:36 +0000

Australia’s largest and most profitable bank, CBA has refused to rule out interest rate hikes that are out of synch with the Reserve bank of Australia.

CBA chief Ralph Norris in a briefing to the market says the lender was “closely monitoring” the cost of funding on wholesale markets, and the level of competition between the major lenders on their mortgage rates.

Last week the central bank held interest rates steady for a third consecutive month, signalling that they were likely to remain that way until the end of 2010 at the earliest.

The issue here, in regard to out-of-cycle interest rate rises, is that we have not made any decision in regards to that,” Mr Norris said.

“We have worked hard over the 2.5 years of the global financial crisis, as it worked through the system, and we have balanced the interests of our customers and our shareholders.

“When you look at our standard variable rate, we have been the lowest or the second lowest in that period. I say that because we remain competitive in the marketplace.

“We have to monitor our funding costs and our pricing. Obviously, on an ongoing basis, we have to continue to monitor the situation and we will decide what we have to do with our pricing when that becomes necessary.”

Mr. Norris’ comments on the lenders interest rate policy follow closely on the heels of similar comments made on Monday by NAB chief Cameron Clyne, who also refused to rule out interest rate hikes out of step with the central bank.

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Static Consumer Spending Forces RBA To Hold Interest Rates Steady

Sharat — Wed, 04 Aug 2010 04:44:19 +0000

Despite rising commodity prices, the Australian central bank has been forced to hold interest rates steady, as consumer spending remains static.

According to financial markets, market participants are widely expecting that the Reserve Bank of Australia will hold interest rates steady well into 2011, unless there is a pick up in consumer spending.

Glenn Stevens the governor of the RBA recently said that households were “displaying a degree of caution” about spending, while he also pointed to continuing uncertainty in the world economy.

Mr. Stevens added that he expects core inflation, which strips out extreme price movements, to trend within the RBA’s inflation target range of between 2 to 3 per cent until the middle of next year.

Federal treasurer Wayne Swan said the decision by the central bank to hold interest rates steady was a tribute to the government’s economic policy, and said the current interest rates were 2.25 per cent lower than when the current government entered office.

“The decision is certainly welcome relief for many families and businesses around the country,” the Treasurer said.

Recent retail and building industry statistics however suggest that both consumers and business continue to remain uncertain about the future.

Retail sales grew by only 0.2 per cent in May, with the annual growth rate of 1.9 per cent far below the long-term average of close to 6 per cent.

Department stores have been the worst affected, with their sales volumes declining 1.4 per cent during the June quarter, with cash spent declining by 2.2 per cent

Matthew Hassan an senior economist with Westpac says that the decline suggests that the average price of goods in department stores must have fallen by 0.8 per cent during the quarter, whilst clothing stores experienced an even larger fall in prices by 1.6 per cent.

He said clothing prices had dropped 5 per cent in the past year, the biggest decline since records started being kept in 1983.

Mr. Hassan says that household reluctance to spend is not as a result of lack of money, because even when interest rate rises have been accounted for, the growth in employment and wages has lifted disposable incomes by a healthy 0.4 per cent.

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RBA Undecided On Further Interest Rate Hikes

Sharat — Tue, 20 Jul 2010 05:28:33 +0000

The Australian central bank has signalled that interest rates may be held steady over the next few months, if inflation data which is to be released next week is in line with forecasts.

“The important question for the board at its next meeting would be whether the new information materially changed the medium-term outlook for inflation,” Australia’s Reserve Bank said in the minutes of its policy meeting of July 6, when it left rates unchanged.

The Reserve Bank of Australia (RBA) believes that the latest inflation data which is due to be released next Wednesday is likely to exhibit further moderation, but the RBA remains hawkish due to the fact that it expects the inflation rate was likely to remain at the upper end of its preferred 2-3 per cent target range.

The central bank at its most recent policy meeting held on July 6th left interest rates unchanged at 4.5 per cent, which was the second consecutive month of leaving them unchanged, after six consecutive rate hikes between October 2009 and May 2010.

The central bank cited previous hefty rate hikes had “afforded flexibility to maintain steady settings in the face of increased international uncertainty”.

The RBA increasingly appears to be in a quandary over the direction of monetary policy, as volatile financial markets make a strong case against further monetary tightening, whilst the Australian economies continues to appear robust, commodity prices are strong, and spare capacity is scarce.

The board minutes said some recent moderation in Asian growth was desirable but there is likely to be some uncertainty in the near term about the extent of the cooling.
The prospect for Australia’s largest trading partner is largely centred around growth for the next few years the RBA said, whilst the labour market continues to maintain its strength, though according to the central bank, according to its data, the housing market has cooled.

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CBA Says Bank Funding Costs To Head Higher

Sharat — Thu, 15 Jul 2010 05:25:04 +0000

New regulations and poor sentiment could well push borrowing costs for banks even higher in the next few months. However according to CBA treasurer Lyn Cobley, the outcome would depend on the results of European bank stress tests.

Ms. Cobley who acts as treasurer for the largest bank in Australia, as measured by market capitalisation holds views that are largely similar to wider sentiments felt by her peers and investors, many of whom also believe that wholesale borrowing costs are likely to head higher to begin with, before receding.

Global investors of late have made demands for higher risk premia in response to the European sovereign default crisis, and almost everyone including Australia’s highest rated lenders have been affected, despite their AA ratings.

CBA says it is well placed to handle volatility in funding costs since it was well ahead of its funding requirements, but added that a heavy fund raising schedule for both governments and corporations expected to take place during the third and fourth quarters would also take its toll on the market Ms. Cobley said.

Ms. Cobley declined to comment on the possibility that higher borrowing costs would mean that lenders would be forced to raise their interest rates outside official moves by the central bank.

The problems affecting the European Union are likely to negatively impact pricing on local bank debt, despite the lack of exposure and solid fundamentals.

“We think there is a possibility spreads will go wider than they are now. Australian banks have been caught up by perceived increased risk in the market generally. Do I think it’s fair pricing? I don’t,” Ms Cobley said.

New global rules on the capital requirements and holding of liquid assets were also another area banks were feeling pressure. Lenders will be required to hold more liquid assets on their balance sheet whilst boosting capital buffers.

“It’s inevitable our liquid assets holdings will get larger and our costs will go up as a result of that,” Ms Cobley said. Australia’s four largest banks have a collective annual funding task of $140 billion, with CBA’s share $40bn to $45bn. About half is sourced from deposits.

Because of a limited domestic investor base, Australia’s banks borrow heavily offshore.

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Half Of All Australian Households Worry About Interest Rate Rises

Sharat — Wed, 14 Jul 2010 06:26:13 +0000

Nearly half of all Australian households say they worry over the threat of looming interest rate rises, but only 20 per cent say they expect to have to carry increased debt levels in the next few months.

According to the results of the latest survey by Dun & Bradstreet, which polled consumer expectations across 1,205 individuals in Australia, nearly half or 49 per cent said they believed that interest rates would rise further, and the hikes would dent their finances.

The credit reporting agency completed the survey in June, one month after the Reserve Bank of Australia (RBA) lifted the official cash rate to 4.5 per cent, its sixth rise in eight months.

Households that include dependent children will feel more financial stress, with 55 per cent of respondents who have children, saying that the impact of rate rises would negatively affect their finances, compared with 43 per cent of households that do not have children.

The survey suggested that the stress from rate hikes would only translate into additional debt for just 20 per cent of households.

According to the survey, which examined future spending in September, nearly half of all individuals polled aged under 50 planned to use credit to pay for expenses over the period, whilst only a quarter of all Australians aged over 50 said they intended to do the same.

The RBA’s credit and charge card statistics for May 2010 showed the average credit card balance reached $3,248 in May, an increase of five per cent in 12 months.

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NAB Strategy Of Low Mortgage Interest Rates Paying Off

Sharat — Wed, 14 Jul 2010 06:20:22 +0000

Australian banking major National Australia Bank (NAB) embarked on a strategy this year of discounting its standard variable rate, is now starting to reap the rewards of the move, as it acquires a larger share of the home loan market.

The number of home loans underwritten by Australia’s fourth largest lender in the last four months rose at its fastest pace in the last half decade. The bank adopted an ambitious plan in 2010 to keep its standard variable rate, now 7.24 per cent, significantly below the levels of its major rivals.

The lenders mortgage book is now estimated at $144.39 billion, and is now the third largest loan portfolio amongst the big four lenders, ahead of rival ANZ and is by far the fastest growing portfolio amongst the big four.

According to data from the Australian Prudential and Regulatory Authority (APRA), NAB managed to increase its market share of the mortgage lending market by six basis points at the expense of larger rivals Westpac and CBA.

The most recent data available is from the month of May, which shows that CBA, Australia’s largest mortgage lender lost four basis points of market share, whilst Westpac’s share fell by 2 basis points.

Over the last quarter, NAB’s mortgage book grew by 14 basis points, whilst CBA’s fell by nine basis points.

NAB also managed to outpace its two larger competitors in the total number of home loans written in May and during the preceding quarter.

NAB’s volume of mortgages rose by 1.3 per cent in May and 3.5 per cent over the quarter.

Lisa Gray, NAB’s group executive responsible for personal banking attributed the robust growth figures to the lender offering the lowest standard variable rate in the market over the last year.

“We started 12 months ago to ensure that our customers received a fair exchange of value,” “For the last four months we outgrew financial system in home lending. It’s the first time we’ve had four consecutive months of growth above system since the middle of 2005.” Ms Gray told The Australian.

NAB attracted headlines in December last year when it was the only major to pass on just the RBA’s official increase of 25 basis points whilst its rivals all increased their rates by between 35 to 45 basis points.

Ms Gray hailed her bank’s low-rate strategy: “We’re seeing more home loan customers join NAB than we’ve seen in years. Our focus on providing a better deal has not only resulted in customer retention and growth; we’re also attracting a higher quality customer portfolio.”

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money-au.com.au » interest rates

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