Rumors of Westpac mortgage rate rise following margin drop

Rising costs of funding have been hitting Westpac’s margin figures more than its competitors as speculation increases that it will have to hike its mortgage rates to bring profits back under control.

Releasing a Q3 update today, Westpac said that its key measure of funding costs – the net interest margin – has shrunk significantly when compared to how much it was typically charging on each loan.

The net interest margin fell a noticeable 11 basis points, dropping from 2.17% to 2.06%. Meanwhile, the Commonwealth Bank of Australia (CBA), one of Westpac’s closest rivals, only saw this same figure drop two basis points to 2.14%, according to figures released earlier in August.

Westpac ended up being one of the losers in Friday trading after the political upheaval finally saw former Prime Minister Malcolm Turnbull ousted by fellow members of the Liberal Party and replaced by Scott Morrison, who takes office today.

Winners saw the ASX 200 rise as a whole with investors backing the Australian dollar, which has suffered during the back-and-forth spats that have split the Liberal Party over the last few weeks, particularly over key measures in energy policy implementation. However, this may have helped Westpac avoid some of the spotlight, which will inevitably focus elsewhere. Many big banks, meanwhile, saw some form of rise in shares.

Bell Potter Analyst TS Lim said that it is looking more likely that Westpac will have to act to combat the shrinking margin gap as the market watches on, noting that the chances of a mortgage rate rise coming out-of-cycle are “becoming inevitable”.

Commenting that he was “just surprised it fell so much,” Lim said that Westpac has not acted to arrest the clear slide in margins. He added that although banks are currently under a lot of pressure from homeowners and in political spheres, “sooner or later you’ve got to do something” – referring to Westpac’s likely mortgage rate hike.

Given the current Royal Commission inquiry into financial misconduct, which includes references to out-of-cycle hikes as well as the charging of additional mortgage fees for services that were not necessary or not provided, banks have relatively short shrift with which to make changes at present.

UBS Analyst Jonathan Mott suggested that this current climate would make it difficult for banks to make themselves look good by passing the costs onto homeowners, and he expects shareholders to try and soak up the rising funding costs for now.

On this basis, Moss confirmed that he has reduced his estimations of profit for Westpac by 5% for the next two years.

Westpac has since blamed some of the contraction on having to deal with an increase in the rate that it costs to swap bank bills, which is the lending rate between banks, and it attributed the loss of five of the 11 basis points to this.

The Reserve Bank of Australia (RBA) has also noticed this, reporting that several smaller lenders had to bump up their lending rates as a result of the rise, which came at the start of the year.

Westpac has also cited a reduction in contributions from its Treasury, which sorts out its funding, and its mortgage book shifting toward lower-interest principal and interest loans.