Major banks are using ‘international borrowing costs’ as a cover to overcharge home loan customers and boost their profits, a damning report by investment firm UBS has claimed.
The report singled out ANZ, claiming the big-four bank had raised its variable home loan rate by twice the amount necessary to cover its own increased borrowing costs.
All the major banks except NAB have said they will raise home loan rates, citing the ‘headwind’ of rising interest rates overseas as the reason. Most commentators expect NAB to follow shortly.
But just hours after the announcements on Thursday, UBS threw the ‘increased borrowing cost’ excuse into doubt, alleging that big banks, particularly ANZ, would profit from these large rate increases, and that this could hurt an “already challenged housing market”.
UBS described Australia’s banking system as an oligopoly — a market with limited competition that is dominated by a handful of major players, leading to higher prices for consumers.
“Today’s announcements demonstrate the oligopolistic nature of the Australian banks and their ability to pass on additional funding costs and more to their customers,” UBS said.
“This is a key reason the Australian banks justify their substantial premium to global peers.”
In other words, their excessive market power means the banks can charge customers uncompetitive fees, which boosts their value in the eyes of investors because it means bigger profit margins.
The big four banks have already been under fire due to scandalous revelations of misconduct at the banking royal commission. The UBS report will further strengthen the perception that they put shareholders before customers.
ANZ reprices to rake in $150 million profit from home loan hikes: UBS
ANZ was the chief target of criticism in the UBS report, after announcing that it will hike variable home loan rates by 16 basis points or 0.16 per on September 27, blaming rising international borrowing costs.
According to UBS, however, ANZ has repriced their home loans at “twice the funding cost headwind” and will rake in an estimated $300 million pre-tax, approximately double that required to offset increased wholesale funding costs.
The company will make as much as $150 million in pre-tax profits from Thursday’s mortgage rate hike, UBS said.
“This round of repricing is significant in that it passes through more than the additional wholesale funding costs to existing customers – especially at ANZ,” UBS said.
“This can be seen in ANZ’s announcement that it is raising rates ‘following the sustained rise in wholesale funding costs as well as considerations of business performance’ (i.e. profit).”
According to UBS the additional repricing is likely to “offset the revenue impacts from the large discounts currently being offered to attract new customers”.
Despite the hike for existing home loan holders, ANZ recently unveiled discounted rates of 3.65 per cent solely for new customers.
The bank did not respond to questions regarding the UBS report put to it by The New Daily.
However, in a press release on Thursday ANZ Group chief Fred Ohlsson described the rate hike as “a difficult decision given we know the impact rising interest rates have on family budgets,” but said the increases were necessary.
“The reality is it is more expensive for us to fund our home loans on wholesale markets and we also needed to balance the needs of all stakeholders,” he said.
CommBank rate hikes called into question
CBA didn’t escape the UBS report’s scrutiny, despite its mortgage repricing appearing to “more closely match funding headwinds” than ANZ.
The bank announced that it would increase variable home loan rates for owner-occupied and property investment loans by 0.15 per cent on October 4.
According to the UBS analysis, however, the size of the rate rise may be unjustified as CBA “recently cut its NetBank Saver deposit rates by 30 basis points, which will provide a boost to revenue above the funding cost headwind.”
CBA declined to comment on the UBS report when questioned by The New Daily.
In a video released following the rate hike, CBA chief executive Matt Comyn said that the bank recognised the increase “will have an impact on customers.”
“But we also think it’s important to price our products, including our home loan products, in a way that reflects underlying costs,” he said.