December 7, 2007

Australian banks raise fixed rates

by Richard Kilner

Story link: Australian banks raise fixed rates

In the last two months the largest Australian banks have raised interest rates on one-year fixed rate mortgages by 50 basis points, on average, according to Merrill LYnch.

The moves have been made in an effort to lessen rising funding costs.

In addition, Merrill Lynch analysed the five largest bank’s pricing and found that, across the board, the most competitively priced products were offered by ANZ.

At the other end of the scale is St George Bank, which is the most expensive bank across the board.

The prices of fixed rate mortgage products have risen rapidly since October, with the sharpest increases taking place by St George Bank and the shallowest by NAB.

BankWest, which is backed by foreigners, is not one of the big five banks in Australia. However, Merrill Lynch have observed that it is passing on very little of the hiked funding costs caused by the US subprime mortgage crisis onto its customers by raising prices only slightly on fixed rate mortgage products.

Every bank, save for St George, has indicated that they will be raising prices for variable rate mortgage products in the future.

It is possible, and believed by Merrill Lynch, that one bank may keep its variable rate mortgage products at a steady price in a bid to expand its market share. Such a move could compel the other banks to lower their prices to match their rival.

Equally, it is possible that adverse market conditions will encourage a spirit of collaboration between the various financial institutions which would prevent such a move.

The latter half of this year has seen the banks maintain their premium pricing, so-called harvesting, in a bid to steady margins as funding costs rise.

Harvesting, raising product prices above the level set by the market leader, can increase revenues, but is a double-edged sword as it can also drive away customers.

ANZ is currently making just 1% of its pre-tax profits from harvesting, compared to 10% for St George.

The National Australia Bank and Westpac both make a little over 7% from the practice, with the Commonwealth Bank taking approximately 5%.