St George Rebels And Lifts Its Rates

The Age

Saturday July 5, 2008

Danny John

ST GEORGE Bank has again increased home loan interest rates, adding more pressure to household budgets already feeling the strain of rising fuel and food costs.

The NSW-based bank, signalling that the global credit crisis has worsened in the past week or so, increased its standard variable home loan by another 20 basis points, taking its interest rate to 9.67%.

That is the highest of all the leading banks.

Yesterday's increase takes effect on Tuesday and will add another $10 a week, or $40 a month, to a $250,000 loan being repaid over 30 years.

The rise comes at the worst possible time for mortgage holders, who have seen the Reserve Bank raise interest rates by 1 percentage point since November and then had the banks independently add 40 basis points over the same period.

The combined impact on monthly home loan repayments has been immense: upwards of $280 added to the cost of servicing a $300,000 mortgage.

The St George move could tempt its competitors, who are sitting at between 9.4% and 9.47%, to go higher.

The bank's decision seems to have taken its rivals by surprise, with Commonwealth, National Australia Bank, ANZ and Westpac all yesterday adopting a "wait and see" approach to the latest mortgage funding problems.

St George blamed the latest rise on the blow-out in credit costs between that charged on official cash rates and the key short-term financing market, the 90-day bank bill rate.

Chief financial officer Michael Cameron said the difference in the two rates still remained "significantly higher" than a year ago when the credit crisis first emerged.

There was also a suggestion from the bank's recently appointed retail banking boss, Les Matheson, that repayments could go even higher if the funding problems did not ease.

"Even with this change, we will not be fully recovering all of our increased funding costs for this financial year," Mr Matheson said.

While having completed its 2008 funding requirements from credit sources, including the higher-priced international debt markets, St George, like all other banks, still needs to tap short-term financing to meet the more immediate loan demands from its customers.

But its announcement underlines the pressures on smaller banks that are rated at a lower financial strength by the credit agencies than the major banks, a factor that makes the cost of raising money more expensive.

St George's single A rating has been given as one of the reasons by analysts for its decision to accept an $18 billion merger proposal from the bigger, and AA-rated Big Four bank, Westpac, in light of the pressures that have been placed on its balance sheet by the global liquidity crunch.

St George closed at $26.77, up 77.