Interest rates on the rise as funding pressures mount

The smaller banks are starting to hike home mortgage rates because they can — and they need to.

Bank of Queensland chief Jon Sutton Cartoon: Sturt Krygsman

The smaller banks are starting to hike home mortgage rates because they can — and they need to. And while the majors are unlikely to move on rates any time soon, the pressure to do so isn’t going away.

Yesterday, Wollongong-based IMB followed BOQ and, earlier, ME and Suncorp in lifting home loan rates even though the RBA is unlikely to move at all this year.

The big four banks have about 80 per cent of the home loan market. With about the same level of the savings deposits market, it means they can fund home loans with relatively cheap money.

CBA has about 27 per cent of deposits and with all that money from schoolchildren, pensioners and new immigrants there is not quite the need to tap credit markets for funds.

Three-month bills are now trading around 2.1 per cent against the cash rate at 1.5 per cent, and this 60 basis point differential is the reason why BOQ’s John Sutton and the others have increased their loan rates.

Short-term money is more expensive, in part because regulations have raised costs. The home loan market is slowing so there is less demand for funds.

This time of year is also traditionally expensive on the money market at the short end, in particular as the financial year closes.

In January three-month bills were around the 1.75 per cent mark and while that is unlikely to be matched any time soon, rates will fall as there is less demand for money.

This will take some pressure off the banks’ funding costs.

The key reason why the big four will not move any time soon is obviously political. With the royal commission in full swing and bank executives having to justify their practices, it’s not a great time to raise rates — while the RBA is sitting on its hands.

But with loan books totalling some $650 billion, the big banks are clearly not immune to the same funding cost pressures.

In round terms, every five basis point increase in the spread between overnight interest rates and 90-day bills cuts bank net interest margins by a basis point.

Big bank margins are now around the 2.15 per cent level so there is not a lot of wiggle room.

BOQ lifted its standard variable home loan rate by nine basis points to 5.7 per cent, which compares with the 5.6 per cent on offer at Suncorp.

The big bank rates are closer to 5.22 per cent at CBA and 5.24 per cent at Westpac and, of course, all of the above have discounted rates.

That said, the writing is clearly on the wall and home loan rates are headed higher.

While the Australian economy isn’t booming the US Fed is planning to increase rates by a full 100 basis points this year, which is raising offshore funding costs.

The Big Four banks enjoy a pricing advantage over the smaller banks of up to 40 basis points, according to the Productivity Commission, due to less APRA supervision — giving them the right to set their own capital weights within set guidelines.

This flexibility saves the big banks about $1.9bn a year, which is why outgoing Bendigo boss Mike Hirst has campaigned for a level playing field for the smaller banks.

APRA notes the increased flexibility enjoyed by the big banks comes at a cost but the PC made clear in its draft report that Australian bank regulations are weighted too heavily to stability and not enough to competition.

Its final report is due to go to Scott Morrison at week’s end. The report will add more weight to the push for open data, with consumers having control over their data to be able to better shop for deals from rival financial service companies.

The PC will also note vertical integration is not the beginning and end of bank conflicts, arguing the fact that the likes of CBA get 37 per cent of its mortgages from the broker channel highlights the importance of this relationship.

While CBA is paying a mortgage broker, arguably the end-consumer is not getting the best deal.

Power play

Treasurer Scott “cry me a river” Morrison will have a big week with reports next week, with the ACCC report on the electricity market due to be handed to the government on Friday. ACCC boss Rod Sims is returning from an Italian holiday to put the final touches to the report, which is well timed ahead of the August COAG meeting on energy policy.

Dumping dilemma

As Orica trumpets its protectionist push for dumping duties on the import of ammonia nitrate from Sweden, China and Thailand, it is worth repeating the Productivity Commission’s recent warning that the benefits of dumping duties are outweighed by the costs for the industries using the goods, consumers and the broader ­economy.

Dumping requires proof the goods are landing in Australia at below normal prices in the country of origin, and proof of injury.

Based on the submission to the Dumping Commission, it’s the second leg which will be hard to prove, given the modest increase in imports.

In this case, the sector being hit is the mining industry, and Incitec Pivot was notable in not supporting the Orica claim even though it faced the same slight increases in import flows.

The Orica case was led by Brisbane-based John O’Connor, who has made a career out of advancing the cause of manufacturers, ranging from BlueScope to Qenos, CSBP and Simplot.

Steel accounts for 60 per cent of all dumping duties in place and, until the explosives application, 86 per cent of applications, making it a lucrative trade for O’Connor.

Crawford’s long reign

In 2003, Lendlease had a new chief executive in Greg Clarke, a troubled investment portfolio in the US, long-time boss David Higgins had quit and the late Jill Kerr Conway wanted to concentrate on other interests — so David Crawford became an “interim” chair.

Fifteen years later, Lendlease has recovered its old glory under Steve McCann and the interim chair is finally stepping aside, handing the reins to Michael Ulmer.

David Gonski has retained his title as the longest-running chair in recent corporate Australia for his 16 years as Coca-Cola Amatil chair and 20 years on its board.

The 73-year-old Crawford is unlikely to top that in his remaining public job as chair of BHP spin-off South32, a job he assumed after 21 years on the BHP board.

The former insolvency practitioner stepped aside from the KPMG chair in 2001 with plans to enrol in a history degree at Melbourne University, which never quite happened.

But his insights from his day job were in constant use at Lendlease, BHP and, in later years, Fosters, which he successfully split into two.

Lendlease has well and truly regained its place as one of the great Australian companies and that is thanks in part to Crawford’s long tenure as chair.

Crawford had said this was to be his last term and, as he prepares to step down, even his beloved Collingwood football club has returned to past glories.