Big banks tipped to keep share of future rates cuts
RBA relief won’t all be reaching borrowers, according to analysis by Morgan Stanley and Australia’s big banks are almost certain to pocket a proportion of any future interest rate cuts.
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Australia’s big banks are almost certain to pocket a proportion of any future interest rate cuts in order to defend their bottom line, a leading investment bank has warned.
But savers should not get their hopes up as the already-low interest rates paid on deposits will also be sliced further, the analysis from Morgan Stanley says.
The report comes as Reserve Bank governor Philip Lowe paves the way for another cut to the cash rate as soon as next month, saying the extent of the nation’s economic slowdown has come as a surprise and Australia cannot ignore falling interest rates across the globe.
Most economists are tipping the RBA to cut the cash rate by 0.25 percentage points at its meeting next week, taking it to a fresh all-time low of 0.75 per cent.
Morgan Stanley expects the RBA to hold fire at its October 1 meeting but deliver cuts in its November and December meetings, taking the cash rate to 0.5 per cent.
The RBA delivered back-to-back rate cuts in June and July — the first cuts since 2016 and first consecutive cuts since 2012 — and the big four banks failed to pass on the full reduction.
National Australia Bank and the Commonwealth Bank passed on 0.44 percentage points out of the possible 0.5 percentage points delivered by the RBA through its June and July cuts to the cash rate.
ANZ passed on 0.43 percentage points while Westpac passed on the least, 0.4 percentage points.
“The major banks adopted different repricing strategies when the RBA cut rates in June and July,” Morgan Stanley said in a research report for investors.
“However, we think all of them would cut home loan SVRs (standard variable rates) by less than 25 basis points (0.25 percentage points) in response to another rate cut.”
Morgan Stanley expects the big four to pocket between 0.05 percentage points and 0.1 percentage points of any forthcoming RBA rate cut.
That would mean they will only reduce standard variable mortgages by 0.15 percentage points to 0.2 percentage points.
Rates on higher-interest savings accounts were likely to be cut by 0.2 percentage points, the investment bank said.
That still would not be enough to fully protect their bottom lines, and the profit margins of the big four were likely to shrink by 0.07 percentage points in the 2020 financial year, it said.
“We have a negative stance on (shares in) the major banks given a challenging operating outlook, an uncertain regulatory environment, the growing threat of disruption and stretched trading multiples,” Morgan Stanley said.
Further cuts to the cash rate are set to hit bank profits as their ability to cut deposit rates further is constrained, given deposit rates are already low.
A quarter of all deposits held by the CBA are paying 0.25 per cent of less while its most popular savings product, NetBank Saver, is paying 0.15 per cent.
Speaking at a business event on Tuesday night, Dr Lowe said weak wage growth, international trade tensions and the drought were all weighing on economic growth.
“We did not expect this slowdown so it has come as a bit of a surprise,” he said.
Dr Lowe added that combination of economic headwinds did not fully explain why the Australian economy had slowed as much as it had.
“At our board meeting next week (October 1), we will again take stock of the evidence,” he said. “Further monetary easing may be required.”