Thursday, October 22, 2015

Westpac and the Commonwealth protect mortgage profits no matter what

If the Commonwealth Bank and Westpac had been located anywhere else, they wouldn't have pushed up rates.

The Australian Prudential Regulation Authority has imposed tough new capital requirements that will require each of the big banks to back up their housing loans with more cash.

In the United States and elsewhere where this has happened the banks' shareholders simply accepted lower returns. More capital made the banks safer, less deserving of an outsized return to compensate for risk.

Not here. Westpac and the Commonwealth seem to believe their shareholders are entitled to outsized returns no matter what.

Westpac's return on shareholder funds is an astonishing 15.8 per cent. The Commonwealth's is even higher - 18.2 per cent.

In the United States, Morgan Stanley, run by Australian James Gorman, accepts high single-digit returns. In Australia recently he said investors around the world were becoming more comfortable with idea of banks holding more capital in exchange for lower earnings.

As recently as two months ago the head of the Commonwealth Bank, Ian Narev, said the same thing. "As you carry a bit more capital and wear a bit more costs, you are going to get a moderate decline in profitability," he told shareholders...

And perhaps to increase them. The best guess within official circles is that if the banks insisted on merely maintaining their profits they would have had to add the equivalent of 0.10 percentage points to the price of each loan. Because (so far) they are raising rates only on mortgages and not on business loans they would probably have to recoup a bit more from each mortgage, although not as much as 0.15 percentage points.

Westpac is lifting its variable mortgage rates by 0.20 points, the Commonwealth by 0.15 points. They are doing it in a year in which their other costs of borrowing have fallen.

The only thing that will make them think twice is losing business. The smaller banks aren't threatened with the same higher costs. They already heavily back their loans. They are in an excellent position to steal Commonwealth and Westpac customers.

The Commonwealth and Westpac think we're too lazy to make the switch.

In The Age and Sydney Morning Herald