Rate Hikes Forcing Australians To Scale Back On Christmas
According to the results of a new survey conducted by mortgage broker Loan Market, one in ten mortgage borrowers have scaled back their plans for the Christmas holidays as a result of higher interest rates.
The survey also suggests that nearly two thirds of people who responded to its poll said they were-evaluating their spending plans as a result of the impact of higher mortgage repayments.
An online survey by mortgage broker Loan Market also found that almost two-thirds of respondents were re-assessing their spending due to higher mortgage repayments.
Dean Rushton, chief operating officer of Loan Market said that the four 25 basis point rate rises by the Australian central bank during 2010 has had a major impact on the economy, particularly on the retail sector, which is in desperate need of a robust Christmas season.
“Many Australians are struggling with the cost of everyday goods as well as services such as power and water, and they needed some interest stability,” he said.
Of the 452 people who responded to the poll, 35 per cent said that banks and the RBA had “turned Santa into Scrooge”, whilst 17 per cent said they were opting for cheaper substitutes instead of more expensive food items over the holiday season.
38 per cent of poll respondents said that despite the increase in their mortgage repayments, it would be “Christmas as usual”
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Australian Banks Deny Gouging Customers With Mortgage Lending Rates
The Australian Bankers Association says that claims that lenders are gouging their customers with their mortgage lending rates are “manipulated”. The ABA issued the rejection of the claim, after think tank the Australia Institute told a newspaper that the banks had lifted their rates higher than the increase in their funding costs.
The Australia Institute says that whilst the official rise in interest rates during the June quarter of last year was an average of 136 basis points, funding costs had risen by only 88 basis points.
Steven Munchenberg chief executive of the ABA says the think tank’s calculations were flawed, because the Australia Institute used interest rates that were averaged over a year.
According to calculations carried out by ABA statisticians, the official cash rate rose by only 68 basis points.
“My quotes were misrepresented — we don’t agree with the Australia Institute calculations or their conclusions. Clearly, if the Australia Institute was correct, bank margins would have grown enormously. The RBA and APRA have both said bank margins have fallen.” Mr. Munchenberg said.
According to the latest data from the Australian Prudential and Regulatory Authority (APRA), margins for the Big Four lenders fell from 2 per cent to 1.9 per cent for the year ending June.
CBA chief executive Ralph Norris echoed Mr. Munchenberg’s comments, saying that Australian lenders were not profiting from lifting their interest rates in excess of official rate rises.
“I think the RBA’s analysis is somewhat at odds with the Australia Institute, and I would tend to take the view of the RBA over the Australia Institute. If you work on averages, you have a situation where you have a starting point and the end point. When you take the average, you draw the line in the middle.” Mr. Norris said.
The Australia Institute rejected the notion that its calculations were inaccurate and said both CBA and ABA were “defending the indefensible”
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Australia’s Small Lenders Say Exit Fees Are Critical
Non bank financial lenders have expressed their concern at proposed government regulations that would ban unfair mortgage exit fees, with the lenders arguing that they should not be subject to the same rules as the big four banks.
Fred Rasheed, sales and marketing director for lenders Rate Busters and Assured Home Loans, said in an interview with The Australian:
“deferred establishment fees” were an essential way to recover the cost of the loan if mortgagees left within five years. Non-bank lenders virtually could not operate; it would probably be the worst thing that could happen, the biggest change to non-bank lenders that has happened since non-bank lending started. The deferred establishment fee has to stay: if that goes the market is going to be in big trouble.”
On Sunday Green Party leader proposed plans for introducing legislations which would seek to prevent Australian banks from raising their interest rates beyond official hikes for up to two years.
“Let’s take action to see that they can’t do the unjustifiable again and let’s make it for 24 months. It can be reviewed then,” Mr Brown said.
Gino Marra chief executive of Carrington National says that whilst he does not support early exit fees, he believes them to be a necessity. Mr. Marra again speaking to The Australian said that any attempt to cut exit fees would result in lenders lifting their interest rates in order to compensate.
“I don’t think it will reduce competition, but it will push rates up and borrowers will be the losers,” he said.
The Australian Securities & Investments Commission has begun actively targeting home loan exit fees which it deems “unconscionable”. ASIC has issued a directive to Australian banks which says that lenders may only charge exit fees which cover their cost, and fees may not include any charges which cover profits that have been lost as a result of a borrower terminating a loan.
The corporate regulator is threatening lenders who fail to comply with the regulations with legal action, and to have the charges either reduced or abolished.
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ANZ Angers Politicians By Raising Interest Rates By 39 Basis Points
Australian banking major ANZ has added to the intense political fire-storm surrounding the banking industry by increasing its standard variable mortgage lending rate by 39 basis points, 14 basis points higher than the official rise in interest rates.
ANZ in an attempt to soften the blow of its rate hike included a number of sweeteners such as abolishing exit fees and discounting switching costs.
Finance minister Penny Wong in condemning the rate hike said that the move would be met by intense public hostility.
Prime Minister Julia Gillard added her voice to the growing criticism by saying that Australian lenders had no excuse for lifting their interest rates above that of the official rate.
Joe Hockey, Treasury spokesperson for the opposition said ANZ “made a mockery of the Gillard government and had kicked sand in the face of Wayne Swan.”
ANZ’s 39 basis point rate hike takes its standard variable rate mortgage to 7.8 per cent and adds another $77 a month in repayments to a $300,000 loan which has a 25 year tenure.
ANZ’s decision follows that of CBA’s move last week to lift its lending rates by 45 basis points. The decision by CBA sparked a political fire-storm which has resulted in ASIC saying the banking industry will come under intense scrutiny and an all out assault on the sector by Mr. Hockey.
ANZ chief executive of Australian operations Philip Chronican said “intense competition for deposits and high wholesale funding costs” had increased the bank’s cost of lending.
“Politicians have their own issues that they are trying to deal with it; we didn’t want to engage in a political debate,” he said.
“I think the issue got out of control in the last week or so and I think we need to bring it back down to a substantive level. We hope it passes and we can have a genuine dialogue with Canberra.”
ANZ sought to soften the blow by introducing a raft of measures designed to placate politicians and consumers. ANZ says it will abolish mortgage exit fees, it will also offer a 44 basis point discount on three year mortgage rates until the end of the year, and will also offer as much as $1,600 in fee discounts, which will have the effect of lowering switching costs for loans.
Prime Minister Gillard speaking whilst attending the G20 summit in Seoul Korea described ANZ’s decision as arrogant and added that it would anger the Australian people. The Prime Minister issued a stark warning to Australian lenders not to doubt the government’s resolve to raise the level of competition within the banking industry.
Penny Wong said that ANZ’s decision showed that the lender had failed to learn from the lessons of the last week and that it would face the same kind of hostility from the Australian people as CBA.
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Big Four Banks Move To Raise Interest Rates By More Than Central Bank Inevitable
As three of Australia’s Big Four lenders have yet to announce their interest rate policy in response to last week’s 25 basis point rate hike by the Reserve Bank of Australia, speculation is mounting that they will all move to raise their interest rates above the official tightening in interest rates.
So far neither Westpac, NAB or ANZ have made announced their intention to follow the lead by CBA, which hiked its interest rates by 45 basis points less than 2 hours after the central bank announced its decision to tighten interest rates last Tuesday.
CBA’s 45 basis increase in its lending rate is nearly double the official hike in interest rates, and its decision to do so, has been the subject of intense political and consumer criticism of the banking industry, which many analysts believe has resulted in CBA’s big four rivals holding off on announcing their interest rate decisions.
The current paralysis is the longest time lenders have held off on lifting their mortgage lending rates following an official interest rate hike since the mid 90’s, when they faced flak for closing branches and cutting jobs. Back then the banks were attempting to win back both consumer and political favour by not raising rates instantly, or passing on official hikes in interest rates to their customers in full.
Despite their holding off on lifting interest rates for now, it is inevitable that Westpac, NAB and ANZ lift their interest rates over and above the central bank increase.
The majority of smaller regional lenders and non bank financials have all raised their key lending rates over the last week and an analysis of those moves suggest that smaller lenders have capped their increases at the same level as the central bank.
Non bank financials such as building societies appear to have lower mortgage lending rates than those of the Big Four, which control more than 75 per cent of the Australian mortgage lending market.
The analysis showed the average standard variable rate in Australia is now 7.09 per cent, based on statistics from 100 lenders.
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CBA Chief Defends Decision To Lift Interest Rates
Ralph Norris, chief executive of Australian banking major CBA has issued a stark warning that “short term populism” will damage Australia’s reputation amongst international investors.
Mr. Norris made his comments whilst defending the decision by CBA to implement a rate hike that was nearly double the official 25 basis point hike in official interest rates enacted by the Reserve Bank of Australia, a move that has been on the receiving end of considerable consumer backlash.
In an interview with The Australian, Mr. Norris took responsibility for the lenders decision to lift rates by 45 basis points. He said that higher costs of funding meant that it was inevitable that such a move would occur independent of whether the central bank had decided to raise official interest rates on Tuesday.
Mr. Norris said that shareholders had been supportive of the decision, but was upset that some CBA staff members had been on the receiving end of a consumer backlash, with customers spitting on, and threatening CBA staff members with violence and verbal abuse.
Mr. Norris said that international investors felt anxiety over the growing level of populism in Australia.
“Offshore investors are getting concerned about the direction of where the Australian political situation seems to be moving and what has been a very well-managed and disciplined approach to a market economy for 25 to 30 years. There’s a view today that there’s a lot more short-term populism driving the agenda rather than long-term policy formulation.” he said.
Federal Treasurer Wayne Swan has been intensely critical of CBA’s decision, describing the move as a “cynical cash grab”. Mr. Swan said that the government intends to introduce a package of banking reforms designed to inject further competition into the Australian banking industry.
CBA’s other Big Four rivals have yet to announce their interest rate policy decisions, as they await the fallout from the lenders decision to lift rates by as much as it has.
Mr. Norris admitted that the rate increase may have the effect of damaging the lenders reputation, but added that the higher cost of wholesale funding meant it was obligated to maintain its profit margin.
“My job is not to be popular – it’s to run a bank,” he said. “I have to make decisions that are not easy. It’s caused me a fair degree of angst. But we had to make a move.”
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Wayne Swan Proposes Banking Reform To Increase Competition
Federal Treasurer Wayne Swan has proposed banking reforms which include government backing for the mortgage bond market and new safety measures which would replace the Federal deposit guarantee. The treasurer is seeking to reform the Australian banking industry by forcing more competition.
Mr. Swan speaking before leaving for a trip to Beijing, warned the Big Four lenders not to underestimated his determination to reform the sector by introducing measures designed to assist their competition and force them to compete.
“It will put pressure on the major banks to behave in a better way and to ensure that their competitors can provide the fierce competition which existed prior to the global financial crisis,” Mr. Swan said.
Mr. Swan said that the financial crisis has had the effect of weakening the smaller regional lenders, and the main challenge was enabling them to obtain cheaper sources of funding.
On Wednesday Westpac reported a whopping 84 per cent gain in full year net profits of $6.3 billion, fuelling public outrage.
Between them, the Big Four lenders have posted $21.7 billion in cash profits for the year, compared with $16.3 billion in the previous year, a combined gain of 33 per cent.
Westpac has so far declined to say whether it intends to follow CBA’s lead in lifting rates in excess of official rate hikes, a move which sparked intense criticism from politicians and members of the community.
Rivals NAB and ANZ have so far also remained silent on whether they intend to undertake similar rate increases.
Mr. Swan denied that that his plans for banking reforms were his attempt to play catch up with his opposition counterpart Joe Hockey’s nine point banking reform plan. He added that he will reveal most of his banking reform proposals next month.
The battle between the government and the Big Four Lenders has intensified, as the government threatens more stringent industry regulation.
“We do live in a society where we do not directly regulate interest rates, so what the government will do in response to this very arrogant action from the Commonwealth Bank is put in place a further raft of reforms that empower consumers and make sure we get the most competitive outcomes, and that’s what we’re going to do,” Mr. Swan said.
Mr. Swan sought to downplay expectations of the government’s ability to control the interest rate policy of the nation’s lenders.
Mr. Swan’s reform proposals are likely to include a number of important initiatives for banking regulation, including how Australia will implement the new Basel 3 regulations and its plans to introduce a new method to assure depositors following the expiry of the existing federal deposit guarantee next October.
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Westpac Full Year Profits Jump A Whopping 84 Per Cent
Australian banking major Westpac reported a whopping 84 per cent rise in full year net profits, which jumped from $3.45 billion a year ago, to $6.35 billion.The stellar result will likely fuel public anger against major lenders, after rival CBA lifted its lending rates by 45 basis points, far outstripping the 25 basis point rate hike enacted by the Reserve Bank of Australia.
Westpac which is Australia’s second largest mortgage lender says it will consider its lending rates over the next few days, but added that it expects funding costs to continue to remain high.
Rivals ANZ and NAB both also said that their lending rates were under review.
For the year ending September 30th Westpac said its net interest margin declined by 11 basis points, which was largely as a result of higher wholesale and deposit based funding costs.
Westpac’s full-year cash profit a performance metric closely watched by investors rose by 26 per cent to $5.88 billion, as revenues increased by 2.4 per cent to $16.91 billion.
The bank declared a final dividend of 74 cents a share, also beating market expectations.
“We began the year in strong shape and finished it even stronger,” chief executive Gail Kelly said. “We are well positioned to meet the challenges in an operating environment, which although improving, remains uncertain.”
“In the year ahead, economic activity is expected to improve further as business investment picks up and global growth trends improve,” Ms Kelly said. “Nevertheless, we expect some legacies of the global financial crisis to remain, including cautious financial markets.”
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CBA Comes In For Intense Criticism Whilst Banks Say They Are Not Opposed To Reform
Despite the fact that CBA has lifted its lending rates by nearly double the official rate hike enacted by the Reserve Bank of Australia, Australian banks say they would be prepared to accept appropriate banking reform designed to increase competition within the industry according to the industry body.
Steven Munchenberg chief executive of the Australian Bankers Association on Tuesday defended CBA’s decision to lift its lending rates by 45 basis points, 20 basis points higher than the 25 basis point rate hike undertaken by the Australian central bank.
“We know these are unpopular decisions,” he told The Australian Online, arguing that funding costs were up on the deposit and wholesale fronts.
Mr. Munchenberg expressed hope that borrowers would appreciate the need for lenders to consider a number of factors when arriving at decision, and that their refusal to “bow to bullying by government” does not mean that banks are not justified in making their decisions.
On Tuesday federal treasurer Wayne Swan heavily criticized CBA for its decision to raise its lending rate by 45 basis points, accusing the lender of a “cynical cash grab”. Mr. Swan added that he would propose banking reforms next month, which would help increase competition within the banking industry.
Westpac, which on Tuesday reported and 84 per cent gain in full year net profits of $6.35 billion, said it would over the next few days consider whether to lift its mortgage lending rates.
Penny Wong, Finance Minister urged lenders to be cautious, saying that CBA customers had every right to feel upset over the bank’s decision to raise its mortgage lending rate.
“I would encourage other banks to consider how their customers perceive them moving from the official independent Reserve Bank increase,” she told ABC radio.
Wayne Swan said that if borrowers were unhappy with the behaviour of their lenders, they should shift their mortgage to another bank.
“Sometimes the only thing that these banks can understand is customers walking down the road,” he told ABC radio.
Despite the intense criticism, ABA chief Steven Munchenberg defended the right for banks to set their interest rates, saying that all lenders faced similar funding cost pressures, but added that the lenders would not be opposed to reasonable banking reform.
“We would welcome appropriate moves to increase competition,” he said.
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ANZ And NAB Increase Market Share Of Mortgage Lending Market
Australia’s two largest mortgage lenders, CBA and Westpac have gradually begun losing market share in mortgage lending to their two smaller rivals NAB and ANZ who have embarked on a strategy of attracting new customers, as they seek to protect their profits from declining margins.
CBA, along with its subsidiary Bankwest continues to remain in its position as Australia’s largest mortgage lender, with a 29.47 per cent of the Australian home loan market.
Despite its lead, CBA lost 0.1 per cent market share during September. Rival Westpac, the second largest mortgage lender saw its market share remain steady at 27.3 per cent according to data from the Australian Prudential Regulation Authority (APRA).
Whilst Australia’s two largest mortgage lenders saw their market share either decline or stall, NAB and ANZ saw their share of the mortgage lending market grow for the fourth consecutive market.
NAB grew its market share by 0.16 per cent, whilst NAB grew 0.05 per cent during September.
The APRA data confirms what many analysts have suspected, that the two lenders have embarked on a strategy of increasing their loan volumes as means of moderating the impact of falling net interest margins.
The strategy has had the effect of limiting revenue, since Australian banks have fought an intense battle for deposit based funding, which has forced them to pay more to attract deposits.
Despite the fact that the Big Four banks have reported record earnings in 2009/10, net interest margins for the majors declined during the second half of the financial year.
During its third quarter, Westpac said its net interest margin fell by two basis points but added that after stripping out volatile items, “the rate of decline is moderating”.
Westpac reports full year earnings on Wednesday and is expected to report that margins have stabilised.
Mortgage lending despite being a strong source of profits for banks still earns less than business loans, but represents the only segment of the credit market to display growth.
This trend resulted in the chief executives of the Big Four banks arguing for the need to lift interest rates beyond any official tightening by the Australian central bank.
NAB has the largest market share of business lending, having captured 21.43 per cent, followed by CBA which controls 19.56 per cent of the market.
The major lenders have all argued that the higher cost of retail deposit and wholesale funding requires them to raise interest.
ANZ chief executive Mike Smith last Thursday said there was now a 60 basis point gap between the interest rate paid to depositors and the rate charged borrowers.