Interpac Business and Migration Solutions Melbourne Australia

(October 7, 2010)

AUSTRALIA'S biggest bank is forecast to raise its mortgage rates by 30 basis points "out-of-cycle" of the RBA in the next six months.

Following comments by ANZ chief executive Mike Smith yesterday that “something has to give”, Morgan Stanley today told clients the Commonwealth Bank needed to raise rates by 50bp over the next year to both offset higher funding costs and maintain full-year 2011 earnings margins.

But analyst Richard Wiles said this would be “difficult” to achieve, and forecast two 15bp “out-of-cycle” rate rises, with the first starting this quarter and another in the March quarter of 2011.

“In our view, regulatory risk will increase if major banks try to protect existing margins and return on equity in retail banking by making several ‘out-of-cycle’ home-loan rate rises during full-year 2011,” he said. “Our forecasts assume just 30bp of ‘out-of-cycle’ rate rises,” he said.

CBA, which is worth about $80 billion and has the biggest share of the residential mortgage market, this week opened the door to lifting its standard variable mortgage rates independent of the RBA.

Its three smaller rivals, ANZ, Westpac and NAB indicated they would hold their rates this month, which range from 7.2 per cent to 7.5 per cent, after the RBA kept the cash rate on hold at 4.5 per cent.

But market strategists see the banks adding at least 15bp on the next official RBA move, to offset higher offshore funding costs.

CBA chief Ralph Norris said in August, when unveiling a full-year net profit of $5.66bn, that margins and earnings growth across its key businesses would remain under pressure but improve in second half 2010-11.

Mr Wiles today said CBA’s retail banking services division, which accounted for 40 per cent of group profit after tax, continues to lose momentum as loan growth slows, average funding costs increase and fees come under pressure.

CBA’s rivals, which report full-year results later this month, are facing the same issues, leading to increased completion for retail deposits and in loan pricing.

Morgan Stanley has a cautious view on Australian banks and is underweight CBA.

(Source:theAustralian)