Australia's big banks move to preserve profitability in mortgage rate hike

It proves they remain able to retain pricing power despite intense scrutiny.

The move by Australia’s major banks to raise home loan rates demonstrates that they retain their pricing power even in the face of growing regulatory scrutiny and widespread customer dissatisfaction brought about by government-led probe, according to rating agency Moody’s. 

Australia and New Zealand Banking Group (ANZ) and Commonwealth Bank of Australia (CBA) raised their home loan rates by 16 and 15 basis points respectively on September which comes on the heels of a similar move by Westpac Banking Corporation which raised its rates by 14 basis points on end-August. Together with National Australia Bank (NAB), the Big 4 control around 80% of the home loan deposit market.

Moody’s lauds the latest mortgage rate hikes as largely credit-positive as the move softens the impact of rising wholesale funding costs and sluggish credit growth brought about by the slowing housing market.

Also read: Could Australia's sharp housing downturn be a blessing in disguise for embattled banks?

"The rate increases benefit ANZ, CBA and WBC, as it underlines the strong pricing power of the banks, a key factor supporting their profitability," Daniel Yu, a Moody's Vice President and senior analyst said in a statement.

A sharp rise in wholesale funding costs has prompted around 16 other smaller banks to raise home loan rates earlier than the major players in an effort to meet profit margins after a housing downturn which has seen residential property prices slow from 4.2% in December 2017 to a measly 0.2% in April.

Even as household leverage remains high in the country, the across-the-board rate hikes are also not expected to significantly boost loan delinquencies and credit costs as labour market conditions are expected to remain strong on the back of solid economic forecasts, added Yu,

Moody’s also expects collateral quality to remain strong, despite ongoing house price corrections in Sydney and Melbourne. The average loan-to-value ratio for Australian bank home loan portfolios remains around 50%.