Westpac’s ‘courageous’ rates lift tempts government reprisal, says UBS

Westpac’s ‘courageous’ decision to lift mortgage interest rates could spark government action, analysts warn.

Westpac’s mortgage loan rate increase announced on Wednesday has been labelled a “very courageous decision” over concerns about how the government may respond.

In a note to clients quoting the quip from fictional TV civil servant, Yes Minister’s Sir Humphrey Appleby, analyst at investment bank UBS Jonathon Mott said that in addition to the royal commission, the banks’ interest rate pricing decisions are under intense political scrutiny.

Shares in the major banks surged on Wednesday after news of Westpac’s rate increase broke.

On Thursday morning new Prime Minister Scott Morrison encouraged Westpac customers to “go to another bank” if they were unhappy with the decision to increase home-loan interest rates.

The prime minister said the bank would have to explain why it was increasing costs for customers in an environment where people are “doing it tough”.

“Westpac has to explain that to their customers,” he said.

“And they have to justify, in this environment, when people are really feeling it, why they believe they need to clip that ticket a little harder when people in Australia and their customers, I think, are doing it tough,” Mr Morrison said.

“If you don’t like what Westpac has done, go to another bank because competition is the key to a more competitive and a stronger and more accountable banking system. They can make those decisions but … customers will make up their own minds, as they should.”

As Mr Mott noted, the prime minister has been vocal on mortgage rates recently. Earlier this month, while still federal treasurer, he gave a speech blasting the banks for taking advantage of customer loyalty.

“Too often it’s the loyal customers that are left to foot the bill through higher interest rates when financial institutions offer temporary discounts to lure in new customers,” Mr Morrison said in the speech.

Actors (L-R) Nigel Hawthorne, Paul Eddington and Derek Fowlds in TV show 'Yes, Minister'.

Mr Mott cautioned that if the major banks all repriced their mortgage books, one response from the government may be to increase the bank levy introduced in the 2017 federal budget.

He pointed to the UK where the bank levy has been increased on nine occasions.

Mr Mott has raised his earnings per share forecasts for Westpac by about 2 per cent to reflect a higher net interest margin (the difference between a bank’s wholesale funding costs and the rate at which it lends to customers) brought about by the rate rise, partly offset by some potential loss in market share.

“While the banks generally follow each other in out-of-cycle repricing, we would not be surprised to see the other banks hold off for a few weeks/months, as they are not facing the same NIM pressure,” Mr Mott said.

The ongoing focus of the Australian Competition and Consumer Commission on competition in the banking sector may “also enable the other majors to regain some share,” he suggested.

Morgan Stanley analyst Richard Wiles said in a note to clients this yesterday that competition concerns had been expected to limit the banks’ ability to move rates. “We note that the ACCC has already stated that competition between the majors has been ‘less than vigorous’ and that ‘there are signs of accommodative oligopoly behaviour’,” he said.

“And in announcing the major bank levy in 2017, the treasurer stated that banks must be “unquestionably accountable, unquestionably fair and our banking system must be unquestionably competitive.

“We had formed the view that pricing power had peaked, rather than come to an end, but the majors would find it difficult to contemplate repricing in the near term given increased scrutiny of conduct and competition,” he said.

“Against this backdrop … [the] repricing was not completely unexpected, but it was greater on owner-occupier loans than we anticipated.”

Mr Wiles predicted that Westpac’s move would open the door for other banks to lift rates soon, “although we think they may raise rates by a smaller amount”.