Smaller lenders – which write 20 per cent of home mortgages – have opted to improve profit instead of market share by following the majors’ rate hikes in varying degrees, citing capital imposts still well above the big banks.
Regional lender, Bank of Queensland, with roughly $35 billion in loans, and the country’s biggest credit union, CUA, with about $11 billion, completed much of the rate change announcements for banks on Wednesday.
BoQ said it would raise all its rates for new and existing loans by 0.18 per cent on November 20 in line with most other lenders.
Its standard variable rate will rise to 5.74 per cent for owner occupiers and 6.03 per cent for investors. Its discount Clear Path rate rises to 4.6 per cent.
Head of retail banking, Matt Baxby, said it needed to balance growth, risk and margins.
“Standardised banks like BoQ still carry much higher funding costs and capital requirements than the major banks and we need to get the balance right between sustainable growth over the longer term, risk and margins,” he said in a statement.
NAB leads way
Led by NAB, from November 12, interest rates for most borrowers will rise by between 0.12 per cent and 0.2 per cent. A lucky few get cuts on basic home loans without popular offset accounts from Yellow Brick Road and CUA of 3.92 per cent and 3.99 per cent, respectively.
CUA’s standard three-year fixed rate will also fall by 0.16 per cent to 4.09 per cent.
Some smaller credit unions still have rates for their basic home loans between 3.9 and 4 per cent.
ING Direct, which has a loan book of about $40 billion – similar to each of the three regional banks – has yet to make a rates decision.
The biggest non-bank mortgage lender Firstmac is waiting on the pricing of its latest residential mortgage-backed security to gauge its funding costs before making a decision later this week.
Under global bank capital rules, which are now being revised, “standardised banks” in Australia must hold a minimum of 35 per cent risk-weighted capital for every mortgage. The average is 39 per cent for regional lenders Suncorp, Bendigo, Bank of Queensland and ME Bank.
Those deemed to have more sophisticated risk-assessment abilities – which is the big four and Macquarie Bank in Australia – are allowed to set their own minimum RWC. But the banking regulator will raise all of these to a minimum of 25 per cent from July 2016.
This was cited as the chief reason by the majors for their recent rate rises.
The smaller banks’ returns on equity range between 5 per cent and 13 per cent. The majors are between 15per cent and 18 per cent.
BoQ’s return on equity rose to 11.2 per cent in the second half of 2015 compared with the major bank average of about 15 per cent.
Apart from its basic rate, CUA will raise all its rates from November 24. Owner=occupier loans go up by 0.13 per cent, with its standard variable benchmark rising to 5.06 per cent. Its loans to landlords will rise by 0.19 per cent to a standard variable rate of 5.42 per cent.
Balance of revenue and competitiveness
CUA chief Rob Goudswaard said it needed to balance its competitiveness with that of its mutual lender peers, many of which still have interest rates below 4 per cent and get back some profits, and ensure it can maintain capital generation.
The credit union’s effective return on equity is 6.2 per cent. Its equity capital, which is all generated by retained earnings, is 14 per cent, which is still well above the majors’ average of just below 10 per cent.
“[A] number of our competitors are still sub-4 per cent, and we are meeting that with a very basic home loan for borrowers with less than an 80 per cent LVR,” he told Fairfax Media.
“[But] as a customer-owned business, we need to balance good value and competitive interest rates for customers today, with the need to be sustainable over the long-term.”
Bendigo and Adelaide Bank announced on Tuesday it would raise rates by between 0.12 for owner occupiers and 0.15 percentage points for investors on November 20. Suncorp pointed to similar action on Monday afternoon, raising rates by 0.16 percentage points from the same date.