Higher Bank Rates, Raisings On The Cards

Sydney Morning Herald

Thursday March 13, 2008

Danny John

THE double prospects of further mortgage rate increases outside officially-sanctioned Reserve Bank rises and possible capital raisings by the leading banks remains high even after across-the-board home loan increases this week of as much as 0.35 percentage points.

With the sixth largest regional bank, Suncorp, yesterday joining the rest of the leaders in lifting its standard variable mortgage by the same amount, the gap between home loans now stands at 10 basis points - the 9.27 per cent offered by Westpac and NAB, with ANZ and St George at 9.37 per cent.

In the middle stand Commonwealth and Suncorp at 9.32 per cent and the much smaller regional, Bendigo and Adelaide Bank, at 9.35 per cent.

The varying rates have prompted questions in the banking industry about how long NAB and Westpac - which raised their standard home loans by 29 basis points and 30 basis points, respectively - will be able to sustain their competition-busting prices.

In a mirror image of the circumstances in January and February, when the banks moved unilaterally - without prompting by the RBA - to try to recover their steeply rising wholesale funding costs, NAB and the Commonwealth both had to lift rates a second time after going low in the first instance.

According to money market data, borrowing costs in the international credit markets have deteriorated since January with funding spreads now having blown out by as much as 100 basis points.

The price squeeze has combined with increasing difficulties in sourcing the necessary funding and that could well lead to credit rationing and capital raisings by the banks to keep the lines of credit open.

ANZ said on Tuesday that rationing was a real possibility even though deposit rates have been lifted by as much as 55 basis points to attract savers. "Not only is wholesale funding now coming at a much higher cost but liquidity is continuing to tighten as global markets ration debt funding," said Brian Hartzer, head of ANZ's retail banking division.

"We have been absorbing a significant part of the increase in the cost of funds but unless we strike a balance between absorbing some of [that] and passing some on to customers, we will ultimately be limited in the amount we are able to lend customers to buy houses or to expand their businesses."

Analysts are also watching the capital positions of the banks closely, particularly after the Commonwealth cancelled a share buy-back plan to preserve $400 million that can fund additional lending.

Investment bank UBS said in a note to clients that if funding conditions on global markets continue to deteriorate then rights issues may be needed to help meet company and personal borrowing needs.