October 14, 2019 / 2:23 AM / a month ago

Australia calls for new probe into loan pricing by banks

MELBOURNE (Reuters) - The Australian government has ordered the competition watchdog to investigate why banks failed to fully pass on three official interest rate cuts this year, but investors shrugged off the new probe after a series of inquiries into the sector.

The Australian Competition and Consumer Commission (ACCC) has been asked to investigate prices charged for residential mortgages by all lenders and how they make pricing decisions, including passing on changes in the official cash rate by the central bank.

The inquiry will also look at differences in prices paid by new and existing customers and barriers that may deter customers from switching lenders.

Shares in the “Big Four” lenders - Australia and New Zealand Banking Group (ANZ.AX), Westpac Banking Corp (WBC.AX), National Australia Bank (NAB.AX) and Commonwealth Bank of Australia (CBA.AX) - traded higher on Monday, in line with the market, underscoring a lack of concern by investors over a new probe.

“Some of these topics have already been looked at,” analysts at JPMorgan said.

Australia’s Big Four lenders dominate about 80% of the country’s A$1.7 trillion ($1.15 trillion) residential mortgage market. They remain some of the most profitable banks in the world, but their earnings fell last year after facing low credit growth and billions of dollars in remediation costs from wrongdoings to customers exposed by the wide-ranging Royal Commission inquiry last year.

A separate inquiry by the Productivity Commission also found the sector lacked competition.

The ACCC is due to deliver its preliminary report by March 30 and a final report by Sept. 30, 2020.

Treasurer Josh Frydenberg said the government needs information on the banks’ funding costs to understand why they are not passing on rate cuts in full, after the Reserve Bank of Australia (RBA) said those funding costs have dropped.

The RBA has cut the official cash rate by 0.25% three times so far this year to a record low of 0.75% in a bid to stimulate consumption and investment in a slowing economy.

In response, Australia’s “Big Four” lenders have cut customer’s mortgage rates by about 0.57%, on average.

“The Australian people are sick of this merry dance where the RBA reduces rates, political leaders and the RBA themselves call on the banks to pass them on in full, and the banks ignore that advice,’ Frydenberg said in parliament,

Frydenberg says the investigation is needed to understand banks’ pricing arrangements but has ruled out levying a tax or legislating banks to force them to pass on rate cuts in full.

MARGIN PRESSURE

“We believe that this will put more pressure on the banks to pass through a larger proportion of ... any further RBA movements,” UBS analysts wrote in a note to clients.

“This would further exacerbate the net interest margin, return on equity and dividend pressure the banks are facing in an ultra-low rate environment.”

In separate statements, the big four banks said the inquiry was an opportunity to explain the challenges Australian banks are experiencing in a historically low interest rate environment.

Westpac, the second largest lender, also defended the pricing decisions of the banks, saying they needed to manage the net interest margin – the difference between deposit and lending rates.

“As part of this process we take into account the interest of borrowers, depositors and shareholders who provide the equity that enables us to operate,” Westpac Chief Executive Officer Brian Hartzer, said in an emailed statement.

“Banks also need to make a reasonable level of return. This not only supports shareholder investment it also underpins prudential stability, and our debt rating.”

Anna Bligh, Chief Executive of lobby group the Australian Banking Association, said the inquiry should help highlight that some of the banks’ funding sources have only small links to Australia’s official rates.

Editing by Lincoln Feast.

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