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  • Michael Clarke

Banks Raising Variable Loan Rates

On Wednesday 14th October "Westpac" group announced a 20 basis point increase to all their variable rate loans. In their press release they rightly stated that this was as a result of them having to put away more cash in liquid assets to satisfy revised rules from the regulator (APRA). It’s because their mortgage book represents a high proportion of their asset base, which applies to most banks, & the Government is concerned about the overheated property market (certainly in metropolitan Sydney).

Essentially the banks are now very clearly operating outside of the "normal" Reserve Bank rate cycle because they are arguing that upward pressures are being placed on their "cost of funds" position. To some degree that’s true. Obviously you cannot make as good a return on a "cash asset" because it’s a lower risk category than say "shares". Because the Government regulator is increasing the percentage of assets they have to hold in "cash / liquid" form from 1/7/2016, it means the banks will get less return on that portion of their total assets. That’s why since the regulator’s announcement on July 20 this year, the four big banks have offered additional share’s in the markets & have raised 24 billion dollars to date. However, I also remember when GST was introduced in Australia & the Government said to all business owners, "do not use this as a reason to increase your operating profit margin". It’s not exactly the same situation, but there is scope for the banks to take advantage of the position the regulator has placed them in. in order to maintain profits & dividends to shareholders. On one hand we want to maintain strong financial institutions, & increased bank liquidity is a positive step in that regard.

However it’s a very intriguing time with lending customers likely to be very disgruntled with the "big banks" given :-

  1. Weak economic growth in Australia

  2. Static unemployment (& some concern over underemployment)

  3. A Reserve Bank looking to decrease the ‘’target cash rate’’ to try & stimulate growth.

  4. A recent increase in most investment home lending rates

Those mortgage borrowers will look at the points above & say "how can the bank be raising my mortgage rate in such an economic climate as this?" The other issue is that there are still lenders offering good 2&3 year fixed rates below 4%. That’s obviously reflective of a weak medium term economic growth outlook, which by the way, likely takes account of a less active or ‘cooling’ property market.

At present, the large (4) banks appear to resemble a juggler walking a tightrope, whilst drinking a glass of water, & attempting to recite the ‘’man from snowy river’’. I’d be taking very careful & measured steps as it’s not easy to appease shareholders, analysts & customers all at the same time.

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