Cba Could Stay Behind To Move Ahead Of Rivals

The Age

Wednesday April 30, 2008

Scott Murdoch

COMMONWEALTH Bank is considering not increasing its standard variable lending rate so it can snare extra market share after the rush of rises from its rivals.

The nation's largest lender is believed to be unlikely to follow the moves of National Australia Bank, ANZ and Westpac in the short term.

It is believed that CBA decided to remain on hold to boost market share, especially after ANZ admitted it would take a reputational hit, particularly on business banking, after the Opes Prime and Lift Capital crises.

ANZ is still mired in the Opes Prime fallout and revealed yesterday that it remained stuck with a stake above 5% in 22 predominantly illiquid, small capitalised stocks.

Commonwealth Bank could be priming itself to expand aggressively into business banking, particularly if ANZ's book started to struggle.

Wholesale short-term funding costs for Australian banks remain well above historical highs, despite moves by the Reserve Bank to pump liquidity into the financial system.

The Reserve Bank was active in domestic money markets yesterday, buying $445 million worth of government and quasi-government bonds and $471 million worth of ADI-securities.

The activity follows surprise trading last week when the RBA moved in to buy residential mortgage-backed securities, which sparked some concern a lender could be in trouble.

The 90-day bank bill - the main source of short-term funding for trading banks in Australia - remains elevated at 7.79%, 54 basis points above the official cash rate.

The next rate move is expected to come from St George, the fifth-largest bank in Australia, which has the smallest retail deposit base and is suffering the greatest margin squeeze of the majors.

The effect of higher interest rates will today be shown, after economists predicted that growth in private sector credit borrowings should have slowed during the past month.

The RBA numbers are expected to reveal that borrowings have risen by 0.8%, well down from last year.

It is expected that the credit results will show that companies are increasingly reliant on the major trading banks for finance, as capital markets remain tight.

Kieran Davies, the chief economist at investment bank ABN Amro, said the push by retail banks would lessen the prospect of the RBA raising official rates to 7.5% when it met on Tuesday.

The futures market is pricing the chance of a May increase at just 7%, followed by a 12% chance in June, 14% in July and 48% in August.

"The banks have been raising rates further and I think that's important to the RBA because the market is effectively doing its job for it," Mr Davies said.

"The pressure on the banks from their funding costs have been intense and you could say they have been slow to raise rates but the pressures have forced their hand."

Following Westpac's move on Monday, CBA has the cheapest standard variable rate at 9.44%, ahead of NAB's 9.46%. ANZ, Westpac and St George stand at 9.47%. Mortgage rates in Australia are now at 12-year highs.

The US Federal Reserve began its two-day deliberations in Washington overnight, and the markets are almost fully priced for a 25 basis point cut in the funds rate.

A reduction of that size would take the rate down to 2%, and some economists expect US Federal Reserve chairman Ben Bernanke could adopt a more neutral tone in the accompanying statement.

To read an extended version of this story online, visit theage.com.au/businessday