The big banks have already offset the hit to earnings from the bank levy


Changes to interest rates by the big four banks will largely offset the drag on profits from the federal government’s bank levy, according to analysis by Morgan Stanley.

A research note from Morgan Stanley shows the banks followed ANZ’s lead and completed a re-pricing of their mortgage loan books.

The banks increased rates on interest-only loans, with a slight reduction in rates for principal & interest and owner-occupier loans.

The big banks have now raised rates on interest-only loans by between 85 basis points and 93 basis points — almost 1% — since April 2016.

The analysts said the changes, with all else being equal, will increase the major banks’ earnings by about 3%, which equates to around $900 million a year.

That will largely offset the impact of the federal government’s bank levy, which is estimated to shave $965 million from the banks’ bottom line net of tax deductions.

Morgan Stanley said the banks may face some headwinds to earnings as investors switch from interest-only to principal and interest loans to take advantage of the lower rates.

“The banks disclose that (more than) 50% of borrowers are more than 1 month ahead of schedule on mortgage repayments,” the analysts said.

Taking that into account, the analysts expect at least some people with interest only loans will be in a position switch into principal and interest loans.

“With the difference in rates expanding to around 56 basis points on OO (owner occupier) loans and around 47 basis points on PI (principal and interest) loans, it looks increasingly likely that some of the (approximately) 42% of borrowers who have an IO (interest only) loan will decide to switch,” they said.

The analysts estimated that if one quarter of those investors on interest only loans made the switch, net interest margins would narrow by around 2 basis points and profits would fall by around 1.5%.

NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at