Two more defy Swan

AUSTRALIAN banks have drawn a line under profit margins, with each of the big four lenders pushing through its own out-of-cycle interest rate rises.

By InvestSMART · 14 Feb 2012

By InvestSMART ·
14 Feb 2012

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AUSTRALIAN banks have drawn a line under profit margins, with each of the big four lenders pushing through its own out-of-cycle interest rate rises.

Commonwealth Bank and National Australia Bank have become the latest to raise their variable lending rates outside the Reserve Bank's regular monthly cycle.

The rates drama began as Westpac and ANZ defied Treasurer Wayne Swan and lifted variable rates by

0.10 and 0.06 percentage points respectively on Friday, after the RBA held its cash rate steady.

NAB said last night it would lift its standard variable home loan interest rate by 9 basis points to

7.31 per cent. Earlier CBA, Australia's biggest mortgage bank, announced that its standard variable mortgage rate would rise 10 basis points to 7.41 per cent.

For both, the rate rise takes effect from Monday.

Investors welcomed efforts by banks to pump up profit margins, sending shares in the big four higher yesterday. ANZ, which also detailed an aggressive program of job cuts, finished 1.6 per cent higher at $21.77. Shares in Westpac and NAB both closed up 1.4 per cent.

Commonwealth Bank closed up 41?, or 0.8 per cent, at $50.29.

Also yesterday, Bendigo and Adelaide Bank increased its standard variable mortgage rate by 15 basis points to 7.45 per cent.

In the space of a week borrowers have gone from expecting an interest rate cut to being hit with a rate rise.

Still, the rate moves may have a silver lining. Analysts say the higher cost of credit through the economy has increased the chance that the Reserve Bank will cut its official cash rate next month.

As with other banks, CBA blamed the rate increase on rising funding costs, adding that greater uncertainty emanating from Europe was exacerbating the situation.

"In making this decision, we have been cognisant of our total funding costs, of which the official cash rate is only one factor," said CBA's group executive of retail banking, Ross McEwan.

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Frequently Asked Questions about this Article…

Why have Australia’s big banks been raising variable lending rates out of cycle?

The article says the big four lenders pushed through out-of-cycle variable rate rises to protect profit margins as their funding costs have increased. Banks blamed rising total funding costs — not just the official cash rate — and cited greater uncertainty from Europe as exacerbating factors.

Which banks recently increased their standard variable mortgage or home loan rates and by how much?

According to the article, Commonwealth Bank raised its standard variable mortgage rate by 10 basis points to 7.41% (effective Monday), NAB lifted its standard variable home loan rate by 9 basis points to 7.31% (effective Monday), Bendigo and Adelaide Bank increased its standard variable mortgage rate by 15 basis points to 7.45% (announced yesterday), and Westpac and ANZ had already lifted variable rates by 0.10 and 0.06 percentage points (10 and 6 basis points) respectively.

How did investors react to the banks’ decisions to lift rates?

Investors responded positively to banks pumping up profit margins, driving share prices higher. The article reports ANZ finished 1.6% higher at $21.77, Westpac and NAB both closed up about 1.4%, and Commonwealth Bank closed up 0.8% at $50.29.

What does this wave of rate rises mean for borrowers expecting a rate cut?

The article notes that in the space of a week borrowers went from expecting an interest rate cut to being hit with a rate rise. However, analysts say the higher cost of credit in the economy caused by these bank moves has increased the chance the Reserve Bank might cut its official cash rate next month.

Could these bank rate increases influence the Reserve Bank’s cash rate decision?

Yes. The article cites analysts saying that the higher cost of credit passed through the economy by bank rate rises increases the likelihood the Reserve Bank will cut its official cash rate next month.

What reason did Commonwealth Bank give for increasing its mortgage rate?

Commonwealth Bank blamed rising funding costs and said greater uncertainty from Europe was exacerbating the situation. CBA’s retail banking executive Ross McEwan said the decision considered total funding costs, of which the official cash rate is only one factor.

Did any bank combine rate moves with other cost-cutting actions like job cuts?

Yes. The article mentions ANZ detailed an aggressive program of job cuts while participating in the broader rate moves.

As an investor, how should I interpret banks raising rates to lift profit margins?

The article indicates investors welcomed the margin-focused moves, pushing big-bank shares higher. In plain terms, rate rises can signal banks are defending earnings in a rising-cost funding environment, and that market participants reacted positively to those efforts in the short term.