Do the big boys really need more money?

There has been much ado lately about the prospect of the big four banks raising interest rates independent of the Reserve Bank. A number of the majors have announced their intentions to increase their retail rates above and beyond any moves the RBA might make on the official cash rate next month.

Such talk has led politicians to weigh in on the debate, suggesting that competition in the finance industry has waned since the GFC and that the big four are planning on slugging borrowers with higher rate rises just because they can.

So what about the banks’ argument? Do they really need extra cash as a result of increased offshore funding costs, or are they simply being greedy?A recent report in the Sydney Morning Herald revealed that although all of the majors are expected to post record high profits, analysts agree that the banks will be forced to raise rates to ensure future earnings growth continues.

In August, the Commonwealth Bank declared record cash earnings of $6.101 billion, while experts predict that the NAB, ANZ and Westpac will all boast similar results for the 12 months to September 30. Estimates put their annual cash earnings for the period at $4.5 billion, $4.89 billion and $5.87 billion respectively.

Obviously the banks are out to make a profit – bottom line – and have to deliver when it comes to their shareholders. So their concerns might be justified given that bank share prices fell in May after restrained revenue and shrinking new interest margins caused many to question their potential for future earnings growth.

This is the primary reason analysts have sided with the banks and agree they have to move on rates sooner rather than later.

CLSA Asia Pacific bank analyst Brian Johnson said, “I thought they needed one several weeks ago. But it really comes down to: ‘Do you think banks should earn returns on equity of 20 per cent or 15 per cent?”

Mr Johnson says the record profits we are now seeing from the banks is simply down to a decline in loan loss charges and that before this decline, the banks’ earnings were fairly weak as was the case globally.

Banking executives are making a lot of noise about the rising costs of loan funding in the offshore wholesale credit markets eating away at their profit margins. As Mr Johnson explains, the rate charged by offshore investors depends on the bank’s business mix and at present this is greatly limited to housing finance. Although this is a profitable aspect of the banks’ overall business, it generates lower margins than business banking.

The bottom line is, while it might seem like a ploy to beef up their profit margins, many analysts have come to the banks’ defense by reiterating what they have been claiming all along; an interest rate hike outside the RBA has to happen.

On the flipside of the argument though, national accounting firm Chan and Naylor say lenders who decide to act independent of the RBA when it comes to increasing interest rates should have their market dominance reviewed by the Federal Government.

In a recent article, chief executive of Chan and Naylor Sal Carrero said, “The bumper-profits of the big four banks dispel the need for rate increases above Reserve Bank levels.”

“This practice calls into question the competitiveness of Australian residential lending. Market dominance is emerging as a real threat to the housing sector.”

“Market concentration has allowed the major banks to act with impunity. There is a genuine need for greater competition and consumer choice,” Mr Carrero said.

“Consumers have been let down by banks which continue to abuse their market dominance and it’s time the Federal Government stepped-in.”


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Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit

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