The Commonwealth Bank becomes the second major bank to pass on Tuesday's increase in official interest rates by the Reserve Bank.
The National Australia Bank (NAB) was the first to pass on the increase.
And NAB chief executive officer John Stewart earlier said there could be more rate rises to come.
"Could there be more rate rises? Well that's clearly a matter for the Reserve Bank - they make that decision," he said.
"It would not surprise me. I think our chief economist is predicting another rate rise early next year."
Meanwhile, Prime Minister John Howard has reiterated his comments that the subprime mortgage problems in the US do not justify the banks hiking their lending rates.
"Well we don't think that there is a case for banks putting up their interest rates beyond official increases unless there is demonstrable evidence that the cost of their funds has risen, particularly when the bank is making a very big profit," he said.
Source: ABC
Sunday, November 11, 2007
Bad news for mortgagors as NAB chief ready to make homeowners pay before Christmas as global credit crunch bites
National Australia Bank has delivered bad tidings to its home loan customers, saying they can expect to start paying for the global credit crunch before Christmas.
The bad news for [mortgagors] overshadowed the good news for NAB shareholders who showed renewed enthusiasm for the bank, Australia's second biggest, which posted a 4.2 per cent rise in net profit to $4.6 billion.
The result was built on solid revenue growth of 8.3 per cent to $14.6 billion that dwarfed cost increases of 0.9 per cent to $7.4 billion.
But there were was no joy for homeowners when bank boss John Stewart delivered the news that yet another rate rise was likely before the end of the year.
NAB on Thursday was the first of the big four lenders to hike its variable home loan rate by 25-basis points - in line with the Reserve Bank of Australia (RBA) increasing its official cash rate to 6.75 per cent this week.
Mr Stewart warned his bank's willingness to absorb the higher cost of funding that followed the fallout from the US sub-prime crisis was fast coming to an end.
"There's a lot more bad news continuing to come out of the (United) States that (is) affecting credit markets," Mr Stewart told reporters.
He said NAB would wait a little longer for the increased cost of its own borrowings to "settle". The increase could potentially be as much as 20-basis points and would be in addition to Thursday's 25-basis point rise.
Mr Stewart said the additional increase would be passed on to customers within a "month or two".
"When that's clearer, then we can do that and I think it will happen and hopefully we can clearly articulate why it has to happen."
Householders should be ready to tighten their belts even further next year, with Mr Stewart predicting the RBA may decide on another rate rise to rein in an overheated economy.
"I think there will be at least one more (rate rise) and it think it will be in the autumn," he said.
The series of rate rises were likely to dent revenue growth in housing lending, but the bank was not concerned about a blowout in bad debt.
In fiscal 2007 the NAB's provisions for bad debts shrank to $1.36 billion, a 16 per cent decrease on the previous year's provisions of $1.62 billion.
As well, the bank expects the strong economy to encourage business to invest more, fuelling growth in its business lending by between 15 to 18 per cent - although the level may retreat from historic highs.
"That's good news for us because we're the dominant business bank in Australia," Mr Stewart said.
The bank plans to grow revenue at better than banking system rates in key areas, with organic growth remaining its preferred option although acquisitions would be considered.
Annual operating expense growth is forecast to remain within inflation as far as 2010.
Even so, there were some disagreeable numbers buried in the balance sheet, including the bank's group net interest margin, a key measure of its profitability, which slipped five basis points to 2.29 per cent.
While the Australian net interest margin was steady in 2007, net margins on NAB's British business tumbled by 48-basis points.
That prompted questions from analysts on whether the bank could get better returns on its capital elsewhere.
"Our inclination, and we have debated this a lot, is you stay with it - but nothing is forever," Mr Stewart said.
HTM Wilson bank analyst Brett Le Mesurier said NAB's revenue growth was the lowest among the big four banks, due partly to slow growth in its British assets.
He said that was offset by the limited growth in expenses.
"If they can continue doing that, then they will be the best-performing bank.
"But they (NAB) tried to do that before when (former chief executive Frank) Cicutto was running it and they came to grief."
NAB's cash earnings rose by 17.7 per cent to a record $4.4 billion, with total lending increasing 13.8 per cent to $394.7 billion, while the value of customer deposits rose 15.2 per cent to $268.4 billion.
In Australia, cash earnings totalled $2.87 billion, a gain of 22.8 per cent following strong growth in the banking and MLC businesses.
The nabCapital arm enjoyed cash earnings growth of 16.6 per cent to $715 million.
For the UK, cash earnings rose by 14.3 per cent to $592 million, despite turbulent market conditions.
NAB's cash earnings per share (EPS) was 268.5 cents in the year, up 16.4 per cent.
The bank declared a final dividend of 95 cents, up eight cents, taking the annual total to $1.82.
At 1514 AEDT NAB shares had risen $1.27 to $43.45.
Source: AAP
The bad news for [mortgagors] overshadowed the good news for NAB shareholders who showed renewed enthusiasm for the bank, Australia's second biggest, which posted a 4.2 per cent rise in net profit to $4.6 billion.
The result was built on solid revenue growth of 8.3 per cent to $14.6 billion that dwarfed cost increases of 0.9 per cent to $7.4 billion.
But there were was no joy for homeowners when bank boss John Stewart delivered the news that yet another rate rise was likely before the end of the year.
NAB on Thursday was the first of the big four lenders to hike its variable home loan rate by 25-basis points - in line with the Reserve Bank of Australia (RBA) increasing its official cash rate to 6.75 per cent this week.
Mr Stewart warned his bank's willingness to absorb the higher cost of funding that followed the fallout from the US sub-prime crisis was fast coming to an end.
"There's a lot more bad news continuing to come out of the (United) States that (is) affecting credit markets," Mr Stewart told reporters.
He said NAB would wait a little longer for the increased cost of its own borrowings to "settle". The increase could potentially be as much as 20-basis points and would be in addition to Thursday's 25-basis point rise.
Mr Stewart said the additional increase would be passed on to customers within a "month or two".
"When that's clearer, then we can do that and I think it will happen and hopefully we can clearly articulate why it has to happen."
Householders should be ready to tighten their belts even further next year, with Mr Stewart predicting the RBA may decide on another rate rise to rein in an overheated economy.
"I think there will be at least one more (rate rise) and it think it will be in the autumn," he said.
The series of rate rises were likely to dent revenue growth in housing lending, but the bank was not concerned about a blowout in bad debt.
In fiscal 2007 the NAB's provisions for bad debts shrank to $1.36 billion, a 16 per cent decrease on the previous year's provisions of $1.62 billion.
As well, the bank expects the strong economy to encourage business to invest more, fuelling growth in its business lending by between 15 to 18 per cent - although the level may retreat from historic highs.
"That's good news for us because we're the dominant business bank in Australia," Mr Stewart said.
The bank plans to grow revenue at better than banking system rates in key areas, with organic growth remaining its preferred option although acquisitions would be considered.
Annual operating expense growth is forecast to remain within inflation as far as 2010.
Even so, there were some disagreeable numbers buried in the balance sheet, including the bank's group net interest margin, a key measure of its profitability, which slipped five basis points to 2.29 per cent.
While the Australian net interest margin was steady in 2007, net margins on NAB's British business tumbled by 48-basis points.
That prompted questions from analysts on whether the bank could get better returns on its capital elsewhere.
"Our inclination, and we have debated this a lot, is you stay with it - but nothing is forever," Mr Stewart said.
HTM Wilson bank analyst Brett Le Mesurier said NAB's revenue growth was the lowest among the big four banks, due partly to slow growth in its British assets.
He said that was offset by the limited growth in expenses.
"If they can continue doing that, then they will be the best-performing bank.
"But they (NAB) tried to do that before when (former chief executive Frank) Cicutto was running it and they came to grief."
NAB's cash earnings rose by 17.7 per cent to a record $4.4 billion, with total lending increasing 13.8 per cent to $394.7 billion, while the value of customer deposits rose 15.2 per cent to $268.4 billion.
In Australia, cash earnings totalled $2.87 billion, a gain of 22.8 per cent following strong growth in the banking and MLC businesses.
The nabCapital arm enjoyed cash earnings growth of 16.6 per cent to $715 million.
For the UK, cash earnings rose by 14.3 per cent to $592 million, despite turbulent market conditions.
NAB's cash earnings per share (EPS) was 268.5 cents in the year, up 16.4 per cent.
The bank declared a final dividend of 95 cents, up eight cents, taking the annual total to $1.82.
At 1514 AEDT NAB shares had risen $1.27 to $43.45.
Source: AAP
Variable rate home mortgage loans among highest takeup in the world
Australians have indulged in a long running love affair with variable rate home mortgage loans, but as times get tougher is it time to fix or split?
The Reserve Bank has just raised the official cash rate by 25 basis points to 6.75 per cent - meaning the standard variable home mortgage loan rate is likely to rise to 8.57 per cent.
Fixing home loan rates can provide certainty about repayments and insure borrowers against future rate rises. On the flip side if rates fall, borrowers can be stuck with a high rate. Splitting a home loan gives borrowers a foot in both camps.
Timing is everything
Even the experts are reluctant to commit one way or another about fixing home loan rates, but in some circumstances splitting your mortgage into fixed and variable portions makes sense.
Shane Oliver, chief economist at AMP Capital Investors, says people who are on the brink of mortgage stress should think about splitting their home loan into fixed and floating portions as a way to make sure they don’t lose their house.
“If you’re at a point where you absolutely can’t afford another interest rate rise or it will tip you over the edge into default then having a fixed rate is a good way to cover it.”
Dr Oliver says while there’s a slight advantage in being fixed at the moment people still need to think ahead to where variable rates might be in a year’s time. He thinks the Reserve Bank is almost done with rate rises, meaning rates could come down over the course of a fixed term home loan.
Although Dr Oliver thinks further rate rises are unlikely, he warns economists have been picking the end of rate hikes for the past couple of years.
“The peak of the cycle has turned out to be a lot higher than people anticipated a couple of years ago, so there still is a risk that maybe we’ll be surprised on the upside and banks will have to continue raising the variable rate.”
Saul Eslake, chief economist at ANZ, thinks there could be two more rate rises in the pipeline, and agrees it makes sense for people to think about fixing at least part of their home loan.
“But people contemplating that need to be very confident about their future income and cashflows, both on the upside and the downside.”
If a homeowner’s circumstances change for the worse they may struggle to meet repayments, and if their circumstances improve they will be penalised for increasing payments.
“Because interest payments on mortgages are not tax deductible people have a strong incentive to pay it off as quickly as possible, including by using any money which happens to come into their hands unexpectedly – from a bonus, a win on the lottery, a pay rise or even from interest rates going down. Fixed rates exclude you from doing that," Mr Eslake said.
Fixed versus variable
A recent survey by mortgage provider QuickDirect found that 83 per cent of people with a fixed rate home loan ended up worse off then their counterparts. But quite a few NEWS.com.au readers disagreed with these findings.
“Worse off? How?” asked one reader. “Mine is locked in for five years on 7.79 per cent with the option of uncapped repayments, and a mortgage offset account. Just as long as I don't pay the entire loan off in five years.”
This view was echoed by another reader.
“In late 2002 I fixed a home loan at 5.9 per cent for 5 years ... this was taken out just before rates started to rise again . It will expire at the end of this year .Who has that rate nowadays? This has helped immensely in reducing the principal considering that we have been making regular extra repayments.”
While some readers liked the flexibility of being able to make extra repayments with a variable rate, others wanted the certainty of fixed rate loans.
“Last week I divided my loan into part variable part fixed for 3 years. This allows me the option of still having a redraw and to make extra payments while the bulk of my loan won't be touched by the rises,” a reader from Tasmania said.
While in most instances extra-repayments are not possible or are penalised on a fixed rate loan, in a rising interest rate environment, some banks and lenders will allow borrowers to make extra payments, if their fixed rate is lower than the market rate.
Australian fixation
According to the Reserve Bank of Australia over 80 per cent of home loans are on a variable rate.
Only Britain has a similar proportion of variable versus fixed rates.
Fixed rate loans were around in Australia in the 1960s but disappeared during a time of high interest rates. They were reintroduced to the market in the late 1980s at a time when variable rates were as high as 17.5 per cent. Home owners who fixed their home loans at between 13.5 and 15.5 per cent won out in the short term, but were burnt when variable rates then fell rapidly.
Before today's hike the major banks were offering fixed rates of between 7.67 and 7.89 per cent for fixed terms of between one and three years. This was lower than the standard variable rate of 8.32 per cent, but pretty much in line with basic variable rates – which range from 7.69 per cent to 7.82 per cent. Today's hike is likely to flow through to the market within the next few weeks.
Source: Newcorp
The Reserve Bank has just raised the official cash rate by 25 basis points to 6.75 per cent - meaning the standard variable home mortgage loan rate is likely to rise to 8.57 per cent.
Fixing home loan rates can provide certainty about repayments and insure borrowers against future rate rises. On the flip side if rates fall, borrowers can be stuck with a high rate. Splitting a home loan gives borrowers a foot in both camps.
Timing is everything
Even the experts are reluctant to commit one way or another about fixing home loan rates, but in some circumstances splitting your mortgage into fixed and variable portions makes sense.
Shane Oliver, chief economist at AMP Capital Investors, says people who are on the brink of mortgage stress should think about splitting their home loan into fixed and floating portions as a way to make sure they don’t lose their house.
“If you’re at a point where you absolutely can’t afford another interest rate rise or it will tip you over the edge into default then having a fixed rate is a good way to cover it.”
Dr Oliver says while there’s a slight advantage in being fixed at the moment people still need to think ahead to where variable rates might be in a year’s time. He thinks the Reserve Bank is almost done with rate rises, meaning rates could come down over the course of a fixed term home loan.
Although Dr Oliver thinks further rate rises are unlikely, he warns economists have been picking the end of rate hikes for the past couple of years.
“The peak of the cycle has turned out to be a lot higher than people anticipated a couple of years ago, so there still is a risk that maybe we’ll be surprised on the upside and banks will have to continue raising the variable rate.”
Saul Eslake, chief economist at ANZ, thinks there could be two more rate rises in the pipeline, and agrees it makes sense for people to think about fixing at least part of their home loan.
“But people contemplating that need to be very confident about their future income and cashflows, both on the upside and the downside.”
If a homeowner’s circumstances change for the worse they may struggle to meet repayments, and if their circumstances improve they will be penalised for increasing payments.
“Because interest payments on mortgages are not tax deductible people have a strong incentive to pay it off as quickly as possible, including by using any money which happens to come into their hands unexpectedly – from a bonus, a win on the lottery, a pay rise or even from interest rates going down. Fixed rates exclude you from doing that," Mr Eslake said.
Fixed versus variable
A recent survey by mortgage provider QuickDirect found that 83 per cent of people with a fixed rate home loan ended up worse off then their counterparts. But quite a few NEWS.com.au readers disagreed with these findings.
“Worse off? How?” asked one reader. “Mine is locked in for five years on 7.79 per cent with the option of uncapped repayments, and a mortgage offset account. Just as long as I don't pay the entire loan off in five years.”
This view was echoed by another reader.
“In late 2002 I fixed a home loan at 5.9 per cent for 5 years ... this was taken out just before rates started to rise again . It will expire at the end of this year .Who has that rate nowadays? This has helped immensely in reducing the principal considering that we have been making regular extra repayments.”
While some readers liked the flexibility of being able to make extra repayments with a variable rate, others wanted the certainty of fixed rate loans.
“Last week I divided my loan into part variable part fixed for 3 years. This allows me the option of still having a redraw and to make extra payments while the bulk of my loan won't be touched by the rises,” a reader from Tasmania said.
While in most instances extra-repayments are not possible or are penalised on a fixed rate loan, in a rising interest rate environment, some banks and lenders will allow borrowers to make extra payments, if their fixed rate is lower than the market rate.
Australian fixation
According to the Reserve Bank of Australia over 80 per cent of home loans are on a variable rate.
Only Britain has a similar proportion of variable versus fixed rates.
Fixed rate loans were around in Australia in the 1960s but disappeared during a time of high interest rates. They were reintroduced to the market in the late 1980s at a time when variable rates were as high as 17.5 per cent. Home owners who fixed their home loans at between 13.5 and 15.5 per cent won out in the short term, but were burnt when variable rates then fell rapidly.
Before today's hike the major banks were offering fixed rates of between 7.67 and 7.89 per cent for fixed terms of between one and three years. This was lower than the standard variable rate of 8.32 per cent, but pretty much in line with basic variable rates – which range from 7.69 per cent to 7.82 per cent. Today's hike is likely to flow through to the market within the next few weeks.
Source: Newcorp
Banks sidestep credit squeeze as business lending soars
The five major Australian banks have shown resilience in the face of a global credit squeeze and reported combined cash earnings growth of 14.7 per cent in fiscal 2007, an industry survey found.
The PricewaterhouseCoopers (PwC) survey also predicts the major banks' underlying cash earnings will grow 11.2 per cent in the current financial year.
The study comes just hours after the last of the big Australian banks, National Australia Bank, reported a 4.2 per cent rise in net profit to $4.6 billion.
Mike Codling, PwC's banking and capital markets leader, said the big banks had side stepped the credit crunch.
"They haven't been exposed to any direct credit losses and because of their diverse funding base they haven't suffered much from the liquidity squeeze," he said.
In fact the major banks had worked themselves into a "sweet spot" by absorbing additional funding costs and keeping variable home loan interest rates on hold to win market share from smaller banks and non-banks, he said.
The major banks had also benefited from an uptick in deposits in a flight to quality, the PwC study concluded.
Recent volatility has seen investors fleeing equity markets, opting instead for the certainty and security of savings accounts with the larger banks, it said.
Mr Codling said the main driver of the banks' results in fiscal 2007 was the growth in lending volumes.
"Business lending has been a stand-out on the back of a very strong economy, with system growth at 23 per cent which we haven't seen for almost 20 years," he said.
Volume growth was partly offset by continuing margin compression, which was down by 10 basis points across the major banks.
Mr Codling said the continued decline in interest margins was largely due to the intense competition.
"But in the last few months the credit crunch has undoubtedly impacted the margins by driving up the cost of wholesale funding," he said.
However Mr Codling warned the credit environment was likely to turn down over the current year after a long benign period.
After rising interest rates and costs were weighed against full employment and a strong economy, it seemed likely credit losses would increase, he said.
"However they are coming off a very low base and what we'll likely see is a return towards more normal long-run averages.
"There are plenty of threats but there are also plenty of opportunities. I'd back the banks to have another strong year."
Source: AAP
The PricewaterhouseCoopers (PwC) survey also predicts the major banks' underlying cash earnings will grow 11.2 per cent in the current financial year.
The study comes just hours after the last of the big Australian banks, National Australia Bank, reported a 4.2 per cent rise in net profit to $4.6 billion.
Mike Codling, PwC's banking and capital markets leader, said the big banks had side stepped the credit crunch.
"They haven't been exposed to any direct credit losses and because of their diverse funding base they haven't suffered much from the liquidity squeeze," he said.
In fact the major banks had worked themselves into a "sweet spot" by absorbing additional funding costs and keeping variable home loan interest rates on hold to win market share from smaller banks and non-banks, he said.
The major banks had also benefited from an uptick in deposits in a flight to quality, the PwC study concluded.
Recent volatility has seen investors fleeing equity markets, opting instead for the certainty and security of savings accounts with the larger banks, it said.
Mr Codling said the main driver of the banks' results in fiscal 2007 was the growth in lending volumes.
"Business lending has been a stand-out on the back of a very strong economy, with system growth at 23 per cent which we haven't seen for almost 20 years," he said.
Volume growth was partly offset by continuing margin compression, which was down by 10 basis points across the major banks.
Mr Codling said the continued decline in interest margins was largely due to the intense competition.
"But in the last few months the credit crunch has undoubtedly impacted the margins by driving up the cost of wholesale funding," he said.
However Mr Codling warned the credit environment was likely to turn down over the current year after a long benign period.
After rising interest rates and costs were weighed against full employment and a strong economy, it seemed likely credit losses would increase, he said.
"However they are coming off a very low base and what we'll likely see is a return towards more normal long-run averages.
"There are plenty of threats but there are also plenty of opportunities. I'd back the banks to have another strong year."
Source: AAP
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