Banks May Defy Swan On Rates

The Age

Wednesday March 5, 2008

Leon Gettler, Financial Services Reporter

WITH their margins now squeezed tighter, the Reserve Bank on the inflation warpath and the prospect of a big increase in bad loans, banks are likely to heap more pain on their customers by lifting their interest rates by more than the central bank's latest 25-basis-point rise.

And with the prospect of more mortgage rate rises this year, there are forecasts that the standard variable rate might soon hit 10%.

"If you look at the speculation about further rate rises, it's not inconceivable," said Macquarie banking analyst Ben Zucker. "That only requires another two to three rate rises."

Last month, National Australia Bank raised its variable rate to 8.98%, 4 basis points more than the RBA's 25-point lift at the beginning of the month. Commonwealth Bank lifted its rate by 30 basis points.

"The repricing they (the banks) have done hasn't been enough to recover the costs and their costs have been increasing," Mr Zucker said. "The same pressures that were there when they raised are still there and they will move to keep up the pace and offset."

If the banks lift rates by more than the Reserve's cash rate, they are likely to cop another spray from Treasurer Wayne Swan. Yesterday, he warned banks that customers would vote with their feet if financial institutions raised mortgage rates by more than 25 basis points.

But what are the banks to do? The cost of acquiring raw material in global capital markets is going up and they still have to lend it, cover their costs and make a profit for their shareholders.

A spokeswoman for ANZ said: "It's inevitable it (the latest RBA rate rise) will be flowing on to mortgage and other rates and there are ongoing pressures in wholesale markets."

Because of Australia's big current account deficit, the banks are forced to raise money on global markets. And the imported money is becoming more expensive.

The short-term market interest rates businesses pay when they borrow money - known here as the bank bill swap rate for short-term loans of up to one year - are rising. Last week, the 90-day bank bill swap rate rose about 20 basis points to 8%.

As well, there is a premium to the swap rate. St George Bank has confirmed that $1.08 billion it raised in 12-month floating rate deposits and certificates of deposit was priced 45 basis points above the swap rate. In other words, it had to pay nearly half a percentage point above the standard rate just to do business.

Similarly, NAB last week paid 78 basis points above the LIBOR, or London interbank offered rate (the overnight cash rate for 24-hour loans), to obtain three-year wholesale funding.

The increased costs are not just hurting the banks. They could have a big impact on the economy.

Because it is now more difficult to raise funds to maintain lending growth, the banks could start rationing lending if they cannot cover their costs.

A report from Lehman Brothers points out that banks' margins are being squeezed at a time when they have to deal with delinquent companies that have suddenly discovered they can't pay their loans.