Westpac tipped to squeeze rate trigger first
Westpac is likely to be the first among the big four to lift its home loan interest rates as pressure builds, according to Morningstar's bank analyst, David Ellis.
Westpac (ASX: WBC) is likely to be the first among the big four to lift its home loan interest rates as pressure builds, according to Morningstar's bank analyst, David Ellis.
Lifting mortgage rates is never popular with the general public, a decision that is no doubt particularly fraught for Commonwealth Bank (ASX: CBA), given the intense public scrutiny and reputational damage of Kenneth Hayne's royal commission.
Expectation of a so-called "out-of-cycle" rate increase from the banks is increasing, even as the Reserve Bank of Australia continues to stand pat on rates, a decision explained in the RBA meeting minutes released last week.
The board of the RBA want it to be a "source of stability and confidence".
A report prepared by the RBA policy board indicates it believes there are further inflation and employment improvements to be gained from holding rates steady, with "no strong case for a near-term adjustment in monetary policy".
"Rather, the Board assessed that it would be appropriate to hold the cash rate steady and for the Bank to be a source of stability and confidence while this progress unfolds."
Morningstar's head of equity research, Peter Warnes, alludes to the pressure on banks to move regardless of the RBA's inactivity on rates: "out-of-cycle rate increases are beginning to infiltrate the banking sector," and "the four majors will be the last to move," he wrote in a recent edition of Your Money Weekly.
But as many of the smaller banks have already bumped up mortgage rates, this eventuality draws closer.
"I wouldn't be surprised to see Westpac as the first among the big four to move on mortgage rates," says David Ellis, Morningstar's banks analyst.
At 68 per cent, Westpac has the highest exposure to home loans among the big four, closely followed by Commonwealth Bank on 66 per cent, according to Ellis. Home loans account for around 55 per cent of earnings for both National Australia Bank (ASX: NAB) and Australia & New Zealand Banking Group (ASX: ANZ).
Ellis believes Commonwealth Bank will also be forced to lift rates soon, regardless of the likely public backlash, if short-term wholesale money market rates stay at current levels.
Outside the big four
No-moat Bank of Queensland (ASX: BOQ) was among the earlier movers on rates in late June, when it increased its variable home loan rates by 15 basis points and 9 basis points for interest only and principle and interest loans, respectively.
In response, Morningstar equity analyst John Likos reduced his fair value estimate for the stock by 13.6 per cent, citing "increased regulatory pressures, heightened housing price risks, an increasingly challenging credit growth environment and a more expensive funding outlook".
Likos believes these rate increases are "a clear attempt" to recoup some of these negative margin impacts. "Currently, the slack is being picked up by the bank’s strong business lending, which has grown at an unsustainably high 11 per cent," he says.
"We believe these headwinds will persist for some time and expect a reduced ability for management to continue to reprice its loan book without material impact to profitability," Likos says.
Bendigo and Adelaide Bank (ASX: BEN) earlier this month lifted rates by up to 16 basis points on its owner occupied principal and interest, interest only, investment loans and lines of credit. However, Morningstar's FVE for the stock was held at $11.50.
"Short-term wholesale funding represents 50 per cent of total wholesale, but is only a small portion of Bendigo's total funding, with higher-quality customer deposits accounting for a high 80 per cent of total group funding," says Likos.
Though he does expect the no-moat bank's profitability to come under further pressure in the months ahead, "as credit growth slows on the back of tighter lending standards and a slowing property market".
"Home loan growth is inevitably tied to the health of the property market, with a strong housing market encouraging new home creation and positive sentiment spurring on auction activity," Likos says.
He notes lending growth across the broader market fell to 2 per cent in the first five months of 2018, from 2.5 per cent in the same period last year. "Bendigo bank home loans grew at the same rate as the banking system, maintaining the bank's 2.4 per cent market share of all home loans. We expect Bendigo's home loan growth to remain subdued, growing at about 4 per cent per year," Likos says.
Morningstar has held Suncorp Group's (ASX: SUN) FVE unchanged at $13, after its mortgage rate increase in early July.
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Glenn Freeman is senior editor, Morningstar Australia.
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