ANZ and Westpac stand to generate the biggest profits from their mortgage customers by being the slowest to pass on cuts to interest rates.
Combined, the two banks are expected to net some $53 million in interest income, as they take as much as two weeks to lower variable home loan rates after the Reserve Bank cut the official cash rate last Tuesday.
While ANZ has broken ranks with its rivals, announcing its rate cut the second Friday of each month, the move also provides a financial pay-off by delaying the date from when its customers receive the benefit of lower rates.
ANZ has said it will confirm its position on interest rate pricing this Friday.
According to JPMorgan analyst Scott Manning, each of the major banks "makes somewhere in the order of $2 million each day that it does not pass on the rate cut".
With ANZ traditionally taking about seven days after its rate announcement to actually pass on the lower rate to customers, this means borrowers will have to wait 17 days until they see any benefit of a Reserve Bank cash rate cut.
Mr Manning calculates ANZ is likely to generate $25 million in additional earnings while it delays passing on rate cuts.
Westpac, another bank that is traditionally slow to pass on rates, is set to generate $28 million over the 13 days it will take to pass on the December rate cut. Westpac has a higher headline mortgage rate than rival ANZ, which means it generates more in interest income over a shorter period.
Commonwealth Bank and National Australia Bank are much quicker passing on this month's cash rate adjustment to customers - taking just six days. Even so, this gap still generates $14 million in interest income for CBA and $11 million for NAB, Mr Manning estimates.
Regional lender Bendigo Bank is among the slowest of the banks to pass on interest rate cuts, taking up to 20 days between the official rate cut and giving the benefit to its mortgage customers.
In its outlook for Australia's banking sector, ratings agency Moody's said banks were increasingly using "pricing power" as one measure to help maintain profits in the face of a low credit growth environment.
Top executives from both National Australia Bank and Westpac are expected to defend their interest rate strategy when both banks front shareholders this week.
Westpac is scheduled to hold its annual meeting in Sydney on Thursday. National Australia Bank also meets on Thursday, in Perth.
NAB is expected to outline whether it will extend its commitment to have the lowest interest rate of major banks into the new year.
Online banker ING Direct is so far the only lender to pass on the full 25 basis point interest rate cut, with most banks opting to pass on just 20 basis points.
Frequently Asked Questions about this Article…
How do Australian banks make money by delaying when they pass on Reserve Bank cash rate cuts to mortgage customers?
When banks wait to lower variable home loan rates after a Reserve Bank cash rate cut, they keep charging the higher rate for days or weeks. JPMorgan analyst Scott Manning estimates each major bank earns about $2 million for every day they don’t pass on the cut. The article says the delay by several banks is expected to produce around $53 million in extra interest income combined.
Which banks were the slowest to pass on the recent interest rate cut and how long did they take?
According to the article, Bendigo Bank was among the slowest, taking up to 20 days. Westpac typically takes longer than some rivals and was set to take 13 days to pass the December cut. ANZ’s timing means borrowers could wait about 17 days before seeing the benefit. By contrast, Commonwealth Bank and NAB passed the adjustment much faster, in about six days.
How much extra profit did ANZ and Westpac generate from delaying rate cuts?
The article cites JPMorgan’s Scott Manning estimating ANZ could generate about $25 million in additional earnings from its delay, while Westpac was set to generate about $28 million over the period it took to pass on the December rate cut.
Did any lender pass on the full 25 basis point cash rate cut immediately?
Yes. Online bank ING Direct was the only lender mentioned that passed on the full 25 basis point cut. Most other banks opted to pass on 20 basis points instead.
How quickly did Commonwealth Bank and NAB pass on the cash rate adjustment, and what did that mean financially?
Commonwealth Bank and National Australia Bank passed the cash rate adjustment in about six days. Even with that quicker response, JPMorgan’s analysis estimated the timing gap still generated roughly $14 million for CBA and $11 million for NAB in interest income.
What are analysts and ratings agencies saying about banks using pricing when credit growth is low?
Ratings agency Moody’s said banks are increasingly using 'pricing power' as a tool to help maintain profits in a low credit growth environment. That observation aligns with analysts’ comments — for example, JPMorgan’s Scott Manning highlighting the daily earnings banks make by delaying rate pass-throughs.
If I’m a mortgage customer, what should I expect about when my bank will pass on an RBA rate cut?
Timing varies by lender. The article notes ANZ typically takes about seven days after its own rate announcement (resulting in a 17-day wait in this cycle), Westpac about 13 days, Bendigo up to 20 days, and CBA/NAB around six days. ANZ said it would confirm its position on interest rate pricing on the Friday following the cut.
Will bank executives have to explain their rate pass-on strategies to shareholders?
Yes. The article says top executives from National Australia Bank and Westpac were expected to defend their interest rate strategies at upcoming shareholder meetings. Westpac’s annual meeting was scheduled in Sydney on Thursday, and NAB was meeting in Perth the same week.
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