We could have a “significant margin headwind,” agrees analyst
The CEO of National Australia Bank said interest rates near zero would negatively impact margins, and banks’ loan books could start to look like those in the UK, according to a Reuters report.
“Remember the UK – which is still a very fixed-rate market as opposed to a variable – banks still make good money out of that,” NAB CEO Ross McEwan said on an earnings call.
The Reserve Bank of Australia cut the official cash rate to 0.1% Tuesday, and said it did not foresee raising rates for at least three years, Reuters reported. While the major banks responded by cutting rates for fixed mortgages, they have not passed the cut on to variable-rate mortgage holders – the majority of their mortgage customers.
From Nov. 10, NAB will reduce four-year fixed rates for mortgages to 1.98% per year – a record low that’s also 69 basis points below the bank’s 2.67% variable mortgage rate, Reuters reported. The bank’s three major competitors are offering similar rates on fixed loans. That means they are competing to lock in a margin of approximately 1.9% on a fixed loan compared to about 2.6% on a variable loan, according to Reuters.
“We now have a very large gap between fixed rates and standard variable rates of up to 100 basis points, so if customers keep switching to fixed products, that creates a significant margin headwind,” Credit Suisse senior banking analyst Jarrod Martin told Reuters.
McEwan said he expected the share of fixed-rate loans to rise above 30% of NAB mortgages, up from about 10% in previous years.
However, if handled well, the growth of fixed mortgages in Australia shouldn’t be as bad as some fear, because they are for shorter periods than in the UK, Reuters reported.