Cba Joins The Party On Home Rate Rises

The Age

Thursday January 10, 2008

By Stuart Washington, Sydney

HOME loan interest rate rises across the board are a near certainty following Commonwealth Bank's decision to follow the lead set by National Australia Bank and ANZ.

CBA's lifting of its standard variable rate by 10 basis points to 8.67% from 8.57% comes despite it being seen as among the big banks least exposed to the increased funding costs that have resulted from the spread of the US credit crisis to world debt markets since August.

CBA said it had incurred $100 million in additional funding costs since the credit crisis started, and it flagged more rises if the funding situation did not stabilise.

The head of retail banking, Ross McEwan, said: "While a higher increase could be justified, we believe that the current level of wholesale funding rates will moderate from the high level experienced pre-Christmas."

About 71% of CBA home loans are variable rate and the increase will add about $20 to monthly repayments on the average loan.

National Australia Bank last week raised its variable rate by 12 basis points and on Monday ANZ raised its variable rate by 20 basis points.

Treasurer Wayne Swan labelled the ANZ rise excessive. "Ultimately banks will be judged harshly by their customers in a competitive market for any excessive interest rate increases, while those banks which keep increases to a minimum may well fare better," he said.

But analysts have backed the moves. Macquarie Bank's Tom Quarmby estimated a rate rise similar to NAB's would net the five big banks a profit increase of 1-2.6%. He predicted this week that most banks would use the NAB move as a trigger to increase their rates.

He also said that bank customers had experienced significant interest rate increases above official interest rate moves in other products such as fixed mortgages (up 20 basis points), credit cards (up 40 basis points) and variable business loans (up 25 basis points).

Major banks' borrowing costs have increased by 0.3%-0.4% since widespread concerns about US subprime mortgage defaults gripped the market.

CBA increased rates despite having one of the highest levels of household deposits compared with its total loan book.

Fujitsu Consulting principal Martin North said CBA had a large deposit base, giving it a cheaper source of funding than banks borrowing money on the wholesale market.

He said that smaller institutions with lower credit ratings and low levels of deposits faced more interest rate pressure.

John Miles, the head of financial institutions for ratings agency FitchRatings, said there would be little reprieve from rates rising to reflect increased funding costs.

"I would say it's going to be pretty much across the banking board generally," he said. "When you look from bigger banks to smaller banks, all of them have been relying on wholesale funding more."

Non-bank lender Virgin Money yesterday raised its variable home loan rate by 25 basis points to 8.09%.