Australia’s major banks have traditionally been the first to respond to higher funding costs by hiking interest rate; however, recent “political scrutiny” and the financial services royal commission may have held them back, according to Moody’s.
Moody’s Investor Service analyst Tanya Tang has noted that, unlike previous trends, smaller lenders have been quickest to respond to the increase in wholesale funding costs with sharper pricing on their home loan products.
Since late June, approximately 16 non-major lenders — including Macquarie Bank, AMP, ING, Bank of Queensland, Heritage Bank, Auswide Bank and Homeloans — have lifted interest rates on their mortgage products, citing a sharp increase in the bank bill swap rate (BBSW).
Ms Tang noted that the big four banks’ decision not to follow suit has come amid “intense political scrutiny” and “against the backdrop... by Australia’s Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry”.
“The smaller banks have been prompted to action because of higher wholesale funding costs and slower loan growth, but the big four — which have traditionally led on rate changes — have so far held back, possibly because of political scrutiny against the backdrop of Australia’s ongoing royal commission into financial services,” Ms Tang said.
Ms Tang echoed the sentiment of the chair of the Property Investors Council of Australia and managing director of Empower Wealth, Ben Kingsley, who told The Adviser's sister title Mortgage Business that a decision by the major banks to increase interest rates would be a “PR nightmare”.
However, Ms Tang said that rate rises from smaller lenders could reduce the risk of a political backlash if the majors choose to follow suit.
“The action of the smaller banks could make it easier for the majors to raise their rates and preserve margins, despite the politically charged nature of the current environment,” the analyst added.
Speaking to The Adviser, chief economist at AMP Capital Shane Oliver recently noted that he expects the big four to succumb to funding pressures, despite having the capacity to better absorb the rise in wholesale costs.
“I suspect that it’s highly likely the major banks will follow suit as well,” Mr Oliver said.
“The major banks have a bit of flexibility because they get more of their funding from depositors than the smaller banks would, and certainly a lot more than the non-bank lenders do.”
Further, Moody’s has stated that despite the “very high level of household leverage” in Australia, it believes that the “current round of modest rate rises can be accommodated without a meaningful impact on bank delinquency rates or credit costs”, citing “favourable employment conditions in the country, loan serviceability buffers and strong collateral”.
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