Higher Rise Tipped As Nab Says Global Costs Not Passed On

Sydney Morning Herald

Friday February 8, 2008

Danny John

CONTINUING financial danger for home owners already digesting two mortgage rate rises in two months was underlined yesterday when the National Australia Bank said it had not passed on the full cost of the global credit squeeze to its customers.

NAB last night was considering whether to match its main rival, Commonwealth Bank, in adopting a rate increase higher than this week's officially sanctioned quarter of a percentage point.

NAB also said yesterday that it expected the problems caused by the world liquidity crisis would last longer and be more widespread than was first thought.

But the chief executive of the bank, John Stewart, said there was no change to NAB's guidance that it would increase its annual profits above last year's $4.4 billion.

NAB was the first of the big banks to make the unusual move last month of raising its interest rates outside the Reserve Bank's cycle of increases, and faces a problem made worse by the need to recover its soaring cost of borrowing from world financial markets.

ANZ Bank faced a political and consumer storm when it raised rates last month by 0.2 percentage points - the highest of the big four. Similar criticism was heaped on the Commonwealth two days ago when it lifted its home loans by 30 basis points instead of the 25 points expected in line with the RBA's decision.

The Commonwealth's move was a response to a gamble that had failed to pay off last month when it raised rates by only 0.1 percentage points in an attempt to grab mortgage business from its competitors whose home loans were more costly.

Contrary to its hopes that global funding pressures would begin to ease, the bank revealed that its costs remained too high and said it had raised rates higher than the official rise to recoup part of those expenses.

Michael Chaney, the chairman of NAB, told shareholders at the annual meeting of the nation's second largest bank in Perth yesterday that it faced the same problem. Only half of the costs being swallowed by the bank had filtered through to the new standard variable home loan rate.

"We've only passed on half of the total cost increase that we've experienced in the past few months," Mr Chaney said.

"You will recall our 12-basis points or 0.12 per cent increase in the variable home loan rates during January, and our total increased cost was more than 20 [basis points]. "It's an issue of balancing competitiveness, customer interest and shareholder interest."

NAB is expected to announce its new rate once ANZ has unveiled its stance today. Market watchers are anticipating matching 25 basis point increases, given the controversy engendered by the Commonwealth.

NAB shares rose to $32.80.