Shareholders may suffer as lenders face rates pressure

A new investigation into the banks’ pricing behaviour is expected to increase pressure on the sector to pass on further rate cuts in full.

ACCC chairman Rod Sims. Picture: Kym Smith

A new investigation by the competition watchdog into the major banks’ pricing behaviour is expected to increase pressure on the sector to pass on further Reserve Bank rate cuts in full, which analysts warn could result in cuts to dividends for bank shareholders.

Josh Frydenberg on Monday announced that the Australian Competition & Consumer Commission would investigate the pricing practices of Australia’s banks after the sector failed to pass on in full the central bank’s official cash rate reduction in October and July.

The big banks will be compelled to explain to the competition watchdog why they are not passing on interest rate cuts, as customers are urged to shop around for better deals.

“The Australian people are sick of this merry dance,” the Treasurer told parliament on Monday.

“We are getting under the hood of the operations of these banks by giving the ACCC the ability to conduct this inquiry with its particular powers to compel important information from the banks.”

ACCC chairman Rod Sims said the days of doing a “set and forget” mortgage were over because banks were not passing on cuts.

“I think you’re better off being an active player in this market if you’re a consumer,” Mr Sims said.

He acknowledged it was in banks’ interests to make it complicated for customers to leave.

“We will be looking at what barriers customers face to switching,” Mr Sims said.

“We’ll be looking at how banks make their decisions in ways that could be seen to make it hard for consumers to switch.”

The cash rate stands at a record low of 0.75 per cent after the RBA cut rates three times this year. Most economists believe rates could be cut as low as 0.25 per cent by February.

UBS analyst Jonathan Mott said the extra political pressure to pass on interest rate cuts could result in further dividend cuts as lenders rebase their profit targets for an “ultra-low rate environment”.

“Just eight months after the Royal Commission into Misconduct in the Banking Industry was handed down, the banks are facing another inquiry, this time into pricing,” Mr Mott said.

“At a minimum, we believe this will put more pressure on the banks to pass through a larger proportion of the expected 25bp RBA rate cut in November and any further RBA movements.”

If the banks were required to eliminate the so-called “loyalty tax” where new customers gain access to cheaper loans than loyal customers, Mr Mott said almost $4bn of annual profits across the big four banks could be wiped out.