Westpac has broken ranks with the major banks to raise its variable home loan rates by 0.2 of a percentage point to 5.68%.
At the same time, the bank announced plans for a $3.5 billion equity capital raising.
Both decisions were laid at the door of stricter rules requiring banks to hold more capital to make them safer.
Commentators say the move, which effectively delivers a rate rise to one out of every five mortgages in Australia, makes it more likely the Reserve Bank will cut official cash rates further from the current 2%.
The Australian dollar fell 0.5% in the minutes following the announcement, currently testing the 72 cent level at .7207.
November RBA cash rate futures have also strengthened, indicating an increased likelihood that the RBA may ease policy further when they next meet on November 3.
They currently put the odds of a 0.25% rate cut at 33%, up from 18% seen yesterday.
Westpac is the second largest lender to owner occupiers, after the Commonwealth Bank, with 21% of the market, and the biggest lender of loans for investment properties.
According to August banking statistics from APRA, Australia’s banking regulator, Westpac had about $190 billion in lending to owner occupiers and $151.4 billion to housing investors.
The interest rate rises will take effect from November 20.
Full year results
The bank also released preliminary full year results, showing a 3% rise in cash earnings of $7.820 billion. Statutory net profit was up 6% to $8.012 billion.
Lending was up 7% and customer deposits rose 4%. The net interest margin of 2.08% was unchanged over the year.
Expenses increased 5%.
Westpac also expects to determine a final, fully franked dividend of 94 cents a share, up 2 cents.
The bank is due to announce its full year 2015 result on November 2.
George Frazis, chief executive of consumer banking, says the amount of capital the bank needs to be held against mortgages will increase by over 50% following regulatory changes.
To meet these new rules, the bank is raising an additional $3.5 billion, bringing to $6 billion in capital raised this year.
The raising is a 1 new share for every 23 Westpac ordinary shares held at $25.50 per new share, a 13% discount to yesterday’s close of $30.44.
“As we have always said publicly, while Westpac is well placed to meet these changes, a significant increase in capital ultimately increases the cost of providing home loans to customers,” Frazis says.
“This is a difficult decision and one that is not taken lightly. We acknowledge that it does impact customers, even in an environment where interest rates remain near historic lows. We have sought to carefully balance the needs of our borrowers, depositors and our shareholders, as well as the competitive market we operate in. Increases in the cost of doing business inevitably influence business decisions, including price.”
More than 70% of Westpac customers are ahead on home loan repayments.
The residential investment property variable rate also increase by 20 basis points to 5.95% a year.
There are no changes to fixed rates. The two year rate for owner occupiers is 4.29% and the three year rate 4.39%.
Depositors get a 0.25% increase on selected new term deposits, effective October 16.
Here’s what Twitter is saying about Westpac’s decision:
AUD/USD extends NY losses as pricing for RBA rate cut by Dec increases from about 35% to 50% after Westpac +20bp on mortgage rates
— Sean Callow (@seandcallow) October 13, 2015
..so Westpac's move makes it more certain RBA will cut again. Watch Nov meeting for a 0.25% cut
— Shane Oliver (@ShaneOliverAMP) October 13, 2015
Wow! A 1.5% cash rate for mid/late 2016 now close to being priced in.
— Stephen Koukoulas (@TheKouk) October 13, 2015
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