Banks refuse to pass on full RBA interest rate cut

The big four banks have brazenly held back half of the Reserve Bank’s official rate cut to shield margins.

Reserve Bank governor Governor Glenn Stevens.

The big four banks have brazenly held back half of the Reserve Bank’s official rate cut to shield margins, reminding investors their pricing power remains intact despite heated political scrutiny of the sector.

Ahead of handing down an expected $9.5 billion profit next week, Commonwealth Bank yesterday got the jump on rivals and within minutes of the RBA’s 25-basis-point cut to the cash rate passed on a reduction of only 13 basis points to customers.

The controversial move made CBA the cheapest of the big four with an advertised standard variable mortgage rate for owner-occupiers of 5.22 per cent, reinforcing the bank’s recent desire for asset growth through discounting and greater use of mortgage brokers.

National Australia Bank moved second, cutting just 10 basis points to 5.25 per cent, also effective from August 19, as the industry resumed its repricing of loans to offset margin pressures caused by intense competition to lend and attract deposits, plus intensifying regulation.

Westpac and ANZ passed on 14 and 12 basis points, respectively, pushing their mortgage rates down to 5.29 per cent and 5.25 per cent.

Property investment mort­gages were cut by the same amount, but remain about 30 basis points more expensive after differential pricing kicked in last year when banks hiked loans to boost profits and meet the regulator’s cap on lending to landlords.

Offsetting the controversial decisions, the banks increased a range of term deposit rates for savers by as much as 60 basis points, increasing one-year deals to 3 per cent. Previously, increased term deposit rates have quickly been withdrawn in subsequent months.

“Given it’s another interest rate cut, given what’s been happening with front book (mortgage) pricing, there’s also been more competition on the deposit front — they probably needed to do this,” said Andrew Martin, a fund manager at Alphinity Investment Management.

Shares in the banks ended in the red in a poor day for the broader market after traders had already priced in the RBA’s cut before the meeting, which resulted in the cash rate falling to a record low 1.5 per cent.

Following the banks’ recent crackdowns on lending to foreigners and buyers of apartments, the RBA noted that “supervisory measures” had strengthened lending standards in the housing market and lenders were being more cautious in “certain segments”.

House-price growth had also eased as demand for credit slowed, which the RBA said suggested that lower rates would not exacerbate risks in the housing market.

While most of the banks — apart from ANZ — passed on the RBA’s last cut in May entirely, more repricing attempts were expected following the election, as the risk of a royal commission into the industry faded.

The banks are experiencing growing margin pressure from lending competition at a time of slowing credit growth and increased regulation that is forcing them to hold higher levels of capital and stable funding sources such as deposits.

Falling official rates also hurt bank margins by eating into profits from deposit books and equity holdings, with Morgan Stanley estimating variable mortgages need to be repriced by eight basis points to offset a 25-basis-point RBA cut.

“Given increased funding costs and capital requirements, (the) changes seek to balance the needs of both customers and shareholders,” said Matt Comyn, the boss of CBA’s retail bank, the group’s largest division.

But Mortgage Choice chief John Flavell lashed the banks, dismissing the “veil of rhetoric” around rising wholesale funding costs and capital requirements.

He said if all lenders followed the major banks, about $2bn would be “taken out of the pockets” of mortgage holders and “placed on to the bottom line” of banks, generating billions of dollars in profits.

In the past 18 months banks have repriced mortgages, business loans and deposits on several occasions, most controversially last year by hiking home loans out of sync with any move by the RBA.

But there has been concern the majors’ pricing power has been diminished in the wake of scandals in financial planning, life insurance and alleged bank bill rate rigging that had intensified the political spotlight on the sector and fuelled Labor’s push for a royal commission.

CLSA analysts have argued weaker pricing power is one of the major issues facing the sector in the medium term after propping up share prices in previous years.

Analysts said the amount held back yesterday — particularly NAB’s 15 basis points — was higher than forecast. Macquarie had pencilled in the banks retaining only 7-10 basis points of RBA rate cuts.

But Mr Martin said banks had to reprice harder as the cash rate fell closer to zero, noting that because they had passed on all of the RBA’s May cut, the overall gains this year from repricing were not “massively net positive”.

“You’ve got pricing power when you can reprice to make a profit, not when you reprice to stand still,” he said.

“That’s what’s happening: they have to reprice. It’s not like they’re repricing to expand their profit margins; they’re repricing to keep their net interest margins stable.”

On a $350,000 mortgage for 25 years, CBA borrowers will save $26.89 a month compared to $51.56 if the bank had passed on the RBA’s cut in full, according to Canstar. NAB is pocketing a larger $31 a month per customer.

Business borrowers will also see their loans — which vary, based on multiple product types — fall by between 10-13 basis points.

Earlier this week, UBS analyst Jonathan Mott warned that while the RBA’s rate cuts gave the banks an “opportunity” to reprice their mortgage books, competition would whittle the benefits away.

“This repricing is unlikely to stick,” he told clients.

“We believe customers have become increasingly educated to contact their bank or broker to ask for larger discounts.”