Big four unlikely to raise lending rates in quest to maintain profits

by John Maguire28 Apr 2016
Ahead of three of the four big banks reporting their interim profits next week, it seems the majors are under no pressure to increase lending rates in order to maintain high profits.

Speaking to Australian Financial Review, Credit Suisse analyst James Ellis said that any increase in lending rates is “not in our numbers”. He added, “The negative for margins is the recent period where funding and hedging costs have increased, plus there is persistent loan-price competition in institutional lending, with Asian banks increasing their market shares.”

Next week will see Westpac (Monday), ANZ (Tuesday) and NAB (Wednesday) announce half-yearly results. Major profits – which can partly be put down to hikes in lending rates in 2015 – are expected to fuel Labor’s call for a Royal Commission into the conduct of big banks.

Victor Kalinowski, founder and mortgage broker at Brisbane-based Blakk Finance, told Australian Broker that the avenues that major banks are taking to maintain profits are to the detriment of consumers - even with a rise in lending rates apparently off the agenda.

“I expect that we’re going to see a more aggressive attitude to costs by many of the big banks as they try to focus on keeping their profits as high as possible,” said Kalinowski. “This will lead to further reductions in staff, possible branch closures, higher interest rates and increased fees and charges – all things that mean worse service to customers.”

“We’re seeing a disconnect between the rates that existing customers are on and the rates being offered to new customers. Big banks seem to be able to consistently change variable rates so that existing customers’ rates edge up over time. They get you in, then start to recoup their costs thinking you won’t bother to switch banks.”

Also speaking to Australian Financial Review, Hugh Dive of Aurora Funds Management lamented the “lack of competition” among Australian banks that has led to a “small abuse of oligopoly position”.

This is borne out by Kalinowski’s experience. He said, “Less lenders in the market ultimately means less choice for consumers. It means higher interest rates, tougher requirements to get a loan and poorer service - consumers and mortgage brokers don’t want to see the industry head this way.
"We’ve already started to see the impacts of less competition play out. Last year we saw a number of banks increase the deposit required for new customers as much as four times, making it even harder for first time buyers to get into the market."