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J.Frydenberg Asks ACCC To Investigate Banks That Do Not Pass Full Rate Cut

Jordan Baird

Jordan Baird is the head ASR Wealth Advisers client services desk and has been with the organisation since 2017. He first started investing in his early years. While he believes that investors should leave no stone unturned he has a particular interest in trading based on broad macroeconomic trends along with specific analysis of innovative up-and-coming companies.

On Monday (14 October 2019), the Treasurer Mr Josh Frydenberg asked the Australian Competition and Consumer Commission (ACCC) to investigate the banks for not passing the full interest cut. This is in light of the most recent RBA 25 basis point rate cut to reduce the cash rate from 1% to 0.75%.

Josh Frydenberg said:

we need all the information at hand about the cost of funds of the banks, about the difference between what they charge existing customers and new customers, and in terms of why they are not passing on these rate cuts in full

 

Josh Frydenberg has asked the ACCC to look into the pricing of residential mortgages products and any obstacles customers face in switching banks. The inquiry will focus on the major banks. The specifics of the inquiry are as follows:

  • Investigating the prices charged for residential mortgages across the entire market, including by major banks, smaller banks, and non-bank lenders,
  • Considering how banks make pricing decisions, including passing on movements in the official cash rate,
  • Examining differences in the prices paid by new and existing customers,
  • Examining differences between the reference interest rates published by suppliers and the interest rates paid by customers, and
  • Investigating barriers that may prevent consumers from switching lenders.

 

Why are the banks not passing the full rate cut?

An important consideration is how the lower interest rate environment is influencing banks’ net interest margin. Over the last few years, movements in interest rates and the net interest margin have been slightly correlated. From 2011, as the cash rate has fallen, so has the net interest margin (see figure 1 and 2). The banks’ capacity to reduce lending rates further without causing the net interest margin to fall is now constrained by the fact there is very little scope for the banks to reduce deposit rates.

 
Figure 1 – Major Bank’s Net Interest Margin

Implication Growth - fig 3

 
Figure 2 – Cash Rate

Implecation Growth - fig 1

In regards to the most recent rate cut, the major banks announced that they would lower their variable housing rate by between 13 and 15 basis points. That is, none of the major banks passed on the reduction in the cash rate in full, possibly reflecting a preference to limit the negative impact on the net interest margin and profitability as well as to remain competitive in attracting funds from depositors.

 

What timing?

The Treasurer said that the ACCC will deliver a preliminary report by 30 March 2020 and a final report by 30 September 2020. Investors could closely monitor this situation and any proposed measures to increase bank regulation, as increases in bank regulation could affect profitability and cash flow.

 


 

Disclaimer:

This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)

(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).

This article is provided for informational purpose only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law, we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceeding. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.

ASR has no position in any of the stocks mentioned.

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