The big Australian banks could take 'months' to match Westpac's mortgage rate hike

(Pablo Blazquez Dominguez / Getty Images)
  • Westpac increased mortgage rates by 14 basis points yesterday, sparking speculation about whether the other big banks would follow suit.
  • However, UBS banking analysts say it could be weeks or even months before CBA, ANZ and NAB raise rates.
  • The analysts said Westpac made the move because it was facing tighter margin pressures than the other banks.

Westpac’s move to increase mortgage rates by 14 basis points (0.14%) was the talk of markets late-yesterday.

It fueled speculation that the other big banks would quickly follow suit, amid an environment of revenue headwinds and higher funding costs.

In a research note this morning, the UBS banking team said the big banks “generally follow each other in out-of-cycle repricing”.

However, analysts Jonathon Mott and Rachel Bentvelzen said it’s unlikely to happen immediately.

“We would not be surprised to see the other banks hold off for a few weeks/months, as they are not facing the same net-interest-margin (NIM) pressure as Westpac,” the pair said.

They said the margin pressures facing Westpac are due to the fact it pursued a more aggressive growth strategy until June.

Yesterday’s announcement by Westpac followed a trading update last Friday, where it revealed an 11 basis point fall in its NIM to 2.06% in the June quarter.

“By comparison, NAB’s NIM ‘declined slightly’ in the June Quarter,” UBS said. “While CBA reported the impact from funding costs was zero in the June half”, with higher funding costs offset by mortgage repricing.

Mott and Bentvelzen also noted that the big four have to exercise particular caution around out-of-cycle rate hikes, amid the fallout from the Royal Commission and ongoing scrutiny by the Morrison government.

“If the major banks all reprice their mortgage books, one response from the Government may be to increase the Bank Levy,” the pair said. They noted a similar levy implemented in the UK was subsequently increased nine times.

Ultimately, the analysts called yesterday’s rate increase by Westpac a “very courageous decision”, and updated 2019/20 earnings per share (EPS) forecasts by 2% to reflect the higher margins.

Westpac shares jumped yesterday immediately following the announcement, but a short time ago were down by around 0.8% in morning trade.

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