Australian lenders offer risky bet on rate hike

MELBOURNE, Feb 9 (Reuters Breakingviews) – Australian lenders should expect a world of rising interest rates. Investors have given the country’s big four a hard time in recent months, largely due to a hot mortgage market that is compressing net interest margins. But a rate hike Down Under may end up disappointing.

In theory, Australian financial institutions seem well placed to benefit from a tightening of monetary policy. A 1 percentage point rate hike by the Reserve Bank of Australia could boost their interest income by 10-12%, UBS analysts calculate. This is a significant amount, as they rely much more on net interest income than their American counterparts. He was 81% of Commonwealth Bank (CBA.AX)top line within six months to the end of December. This figure was 43% for JP Morgan(JPM.N) last year and 55% to $88 billion American bankwhose light capital markets businesses are more comparable to local giants based in Sydney and Melbourne.

However, it is unlikely that any of the major central banks will raise rates by one percentage point all at once. Moreover, the RBA is taking a more dovish line than some: Commonwealth Bank expects just one increase this year of around a quarter of a percentage point, although traders are starting to expect a few more.

Join now for FREE unlimited access to Reuters.com

Register

Even then, it’s not just gravy for the banks. The country’s recent home loan boom has left wads of mortgage debt on their books, with many homeowners locking in fixed low rates for up to three years. So these will not generate more revenue when the RBA moves.

Second, fierce competition between the Big Four and other lenders will only intensify elsewhere. There will be a battle to entice borrowers to refinance mortgages when their fixed-rate terms end, for example, even as the rising cost of debt could lead to lower home sales and new Mortgages.

They will also fight for deposits, as customers will want to seek out more profitable accounts. The Commonwealth estimates that only A$170 billion, or 21% of the deposits it holds, are safe from this. Those betting that central bank tightening will grease the earnings gears for lenders Down Under may be overly optimistic.

To follow @AntonyMCurrie on Twitter

BACKGROUND NEWS

– The Commonwealth Bank of Australia on Feb. 9 reported net profit for the six months to the end of December of 4.7 billion Australian dollars ($3.4 billion), an increase of 23% over the same period in 2020. This is largely due to loan loss write-downs going from a loss of nearly A$900 million to a gain of A$75 million.

– The lender’s net interest margin decreased by 0.14 percentage points to 1.92%.

– The bank announced a A$2 billion share buyback program and an interim dividend of A$1.75 per share, an increase of 25 cents per share.

Join now for FREE unlimited access to Reuters.com

Register

Editing by Robyn Mak and Katrina Hamlin

Our standards: The Thomson Reuters Trust Principles.

Comments are closed.