Copycat Banks Move To Fuel Rate Rise Pain

The Age

Monday March 10, 2008

Danny John, Sydney

THREE of the country's top five lending banks are set to follow the lead of rivals National Australia Bank and Westpac in lifting their home loan interest costs above the 0.25% increase in cash rates levied by the Reserve Bank.

ANZ, Commonwealth and St George will almost certainly raise their rates over the next two days, with only the size of the increases splitting their respective positions.

ANZ chief executive Michael Smith, having warned investors on Friday about the constant pressure being placed on his bank's bottom line by the global credit crisis, is likely to sanction a rise of about 0.35% - 10 basis points higher than the Reserve and 5 points above Westpac's new rate.

ANZ, which is likely to announce its new level tomorrow, has tended to adopt a tougher line over the past three months by going higher in one hit when the banks began passing on the added costs of raising money from the international wholesale funding markets.

This has contrasted with the tactics adopted by NAB and the country's biggest lender, CBA, which sought to hold its January increases at about 10 basis points but was forced to go again with a top-up to the RBA's sanctioned rise last month.

CBA is believed to have learnt from that experience and may match or even go slightly higher than the 0.3% increase Westpac unveiled on Friday.

Coupled with NAB's 0.29% rise, the average standard variable mortgage rate across the lending sector now stands at 9.27%, but ANZ and St George could go above that.

Both Mr Smith and St George chief executive Paul Fegan warned in separate presentations that the banks' own costs of borrowing were showing no sign of abating. In the case of NSW-based St George, a 0.4% increase was required to bridge the financing gap.

All the banks have come under sharemarket pressure, having seen their share prices slump with the impact of growing corporate-sector liabilities, and as the liquidity crisis has squeezed their margins.

Mr Smith said on Friday that the fall-out would continue to affect the price of loans to the consumer and business sectors, with price rationing of debt now a real possibility.

"Certainly, I believe the increase we pass on will have to strike a balance between the additional increase in funding costs and what we pass on to customers and what we absorb ourselves," he said.

Analysts at investment bank Macquarie Group have indicated that rises of about 40 basis points would be the "best outcome" for the banks given the circumstances.

A rise of 50 basis points would ease their margin pressures but it would also result in a sharp fall-off in home loan growth, according to Macquarie Research.

© 2008 The Age

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