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…
Why are ANZ and Westpac expected to generate big profits by delaying passing on RBA rate cuts?
ANZ and Westpac are expected to generate more interest income by being slower to lower variable home loan rates after the Reserve Bank cut the official cash rate. JPMorgan estimates the two banks could net about $53 million combined, with ANZ around $25 million and Westpac about $28 million, because they delay passing on cuts for days to weeks.
How much can major banks earn each day by not immediately passing on an interest rate cut?
According to JPMorgan analyst Scott Manning, each major bank can make 'somewhere in the order of $2 million each day' that it does not pass on the rate cut to mortgage customers.
How long do different Australian banks take to pass on a cash rate cut to mortgage customers?
Timing varies by lender: the article notes ANZ borrowers may wait about 17 days, Westpac about 13 days, Commonwealth Bank and NAB about 6 days, and regional lender Bendigo Bank up to 20 days between the official cash rate cut and the benefit reaching mortgage customers.
Did any lenders pass on the full 25 basis point RBA cash rate cut?
Yes — online banker ING Direct was reported as the only lender to pass on the full 25 basis point rate cut. Most other banks opted to pass on only 20 basis points.
What does Moody's say about banks using pricing power after rate cuts?
Ratings agency Moody's said banks are increasingly using 'pricing power' as one way to help maintain profits in a low credit growth environment, which helps explain why some lenders delay or limit passing on rate cuts.
Will bank executives have to explain their interest rate strategies to shareholders?
Yes. Top executives from National Australia Bank and Westpac are expected to defend their interest rate strategies at shareholder meetings this week. Westpac is scheduled to hold its annual meeting in Sydney on Thursday and NAB meets in Perth on Thursday.
How does a bank's headline mortgage rate affect how much it earns when delaying rate cuts?
A higher headline mortgage rate means a bank earns more interest income over the same delay period. The article notes Westpac has a higher headline mortgage rate than ANZ, which is why it generates more income over a shorter delay.
What should mortgage borrowers do after an RBA cash rate cut?
Borrowers should watch for public announcements from their lender (for example, ANZ said it would confirm its position this Friday) because banks vary in how quickly and how much of a cut they pass on. Expect differences between lenders — some pass the full 25 basis points, others pass 20, and the timing can range from about six days to 20 days.
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