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Australian banks raise mortgage rates to help offset higher funding costs

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Australian banks raise mortgage rates to help offset higher funding costs

Three of Australia's four major banks have raised mortgage rates to partially offset an increase in their funding costs, but analysts expect bank margins to continue to remain under pressure.

Commonwealth Bank of Australia and Australia & New Zealand Banking Group Ltd. on Sept. 6 announced an increase in their variable home loan rates, citing pressure from a sustained increased in wholesale funding costs. CBA and ANZ will raise effective rates for home loan customers by 15 basis points and 16 basis points, respectively.

The move follows Westpac Banking Corp.'s Aug. 29 announcement that it would raise rates for property loans by 14 basis points starting Sept. 19. Meanwhile, National Australia Bank Ltd. is expected to follow suit soon, the Herald Sun reported Sept. 6.

The banks' move to increase rates on property loans was expected, as wholesale funding costs have risen in recent months, analysts said.

Australia's bank bill swap rate, or BBSW, is the main short-term reference rate used for pricing domestic debt and has been rising in recent months, even as the country's central bank on Sept. 4 held its cash rate at 1.50% for the 25th consecutive month.

An increase in U.S. short-term bank funding costs led to a rise in the cost of U.S. dollar funds for Australian banks, the Reserve Bank of Australia noted in an August statement on monetary policy. As a result, banks in Australia moved to raise more short-term funding at home, driving an increase in domestic funding costs.

"It was only a matter of time," said Azib Khan, a Sydney-based senior banks analyst at Morgans Financial. "The banks are now starting to form the view that it looks like that elevated cost of funds is here to stay for the moment."

Smaller and regional lenders, as well as nonbank lenders, have already increased their variable home loan rates this year. These lenders have a lower level of deposit funding relative to the biggest banks with large deposit franchises. Some have been "feeling the pinch more because their funding is entirely priced off the swap rate," Khan said.

Khan estimated that the sustained rise in the bank bill swap spread by 30 basis points could have ultimately hit the major banks' net interest margins by 6 basis points. "With the repricing, that should be enough to offset that NIM pressure [by] 5 or 6 basis points. It will be enough for the major [banks] to try to hold their NIMs flat," he said.

Sharad Jain, a Melbourne-based credit analyst at S&P Global Ratings, noted that while the increase in home loan rates does "mute the impact a little bit," there remains some pressure on interest margins. "We don't expect this to be boosting or increasing their profits. We think this might not even be enough to maintain their margins or improve them," Jain said.

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.