Crafty Banks and Hard Braking – more rate rises to come

Crafty Banks and Hard Braking – more rate rises to come

On Friday the Commonwealth Bank of Australia (CBA) became the second of the big four banks to increase interest rates for property investors. The media reported over the weekend that the reason for this is an effort to “rein in” investor lending.

This is nonsense. In the CBA’s case, they have applied the increase retrospectively. That is, the increase has been applied to existing loans as well as new loans. We are not quite sure how applying a higher rate to people who have already purchased an investment property ‘reins in investor lending’ that has already been lent?

According to reports CBA will lift the variable rate on investor home loans by 0.27 percentage points to 5.72 per cent, while fixed rate investor loans will also increase between 0.10 and 0.40 percentage points.

Those who have been watching closely will remember that earlier in the week ANZ also raised rates on investor mortgages.

Here at Montgomery we note our brokers are forecasting the following for the amount of net interest margin expansion required from the increase in mortgage risk weighting on the overall mortgage book to align Return on Equity (ROE) to previous levels, post the Common Equity Tier 1 (CET1) capital increase:

So far ANZ and CBA have increased mortgage rates by around 27bpts on investment mortgages.

In other words, the recent move by one of the Big Four is designed to recoup the lost ROE from the required increase in CET1 capital, not just to slow the rate of investment loan growth as the banks are suggesting, but also because it re-prices the entire loan book not just new mortgages.

It also appears to us that further rate increases are required to make up for the reduction in ROE on owner occupied mortgages. But this is likely to be shared across multiple products (deposits, credit cards, business lending, mortgages, fees, reduced premium customer discounts etc)

The increase in CET1 required from the initial adjustment to mortgage risk weights by APRA is only the first step, with further increases in minimum capital adequacy ratios likely to be announced later in the year once Basel 4 is finalised.

So keep in mind how this might affect credit growth at the banks, which have been enjoying the following from the May private sector credit growth data:

• Business lending increased 5.4 per cent year-on-year,
• Owner occupied housing credit increased slightly less than 6 per cent year-on-year,
• Investment property lending increase 10.4 per cent year-on-year, above APRA’s stated ceiling of 10 per cent.

Roger Montgomery is the founder and Chief Investment Officer of Montgomery Investment Management. To invest with Montgomery, find out more.

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Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.