Disclaimer: The content from The Daily Reckoning Australia’s global cast of characters is their own view and opinion. It is not to be taken as investment advice.
Aussie Banks Are Preparing
The big bad banks are back in the news again.
This time, however, it’s because of what one bank didn’t do.
Last week, Westpac, ANZ and Commonwealth Bank all raised their home loan rates within days of each other.
Owner occupier or investor. It didn’t matter which.
Rates went up.
That’s in spite of the fact that the Reserve Bank of Australia (RBA) hasn’t increased the cash rate in two years.
Obviously, if three of the four major banks were increasing rates, it was only a matter of time for NAB to follow suit.
Except that NAB didn’t raise rates.
And that may make NAB the riskiest bank in Australia right now.
Bumping up the cash on hand
The major banks aren’t the only ones increasing the mortgage rate. The smaller ones have as well.
Meaning that if NAB did increase rates, it would’ve been given some sort of cover to do so.
Yet in a surprising twist, NAB chose not to bump up the home loan rate.
‘We are listening and acting differently,’ said Andrew Thorburn, chief executive of NAB. ‘We need to rebuild the trust of our customers, and by holding our NAB Standard Variable Rate longer, we help our customers for longer.’
Once again, it gave our new Prime Minister, Scott Morrison, the chance to pretend he feels everyday people problems. He tweeted, ‘Good call by @NAB not to lift mortgage rates. They seem to get it.’
Yet, by congratulating NAB for not raising rates, Morrison ignores what is really happening with Aussie banks.
There’s a good reason why banks are raising rates when the Reserve Bank of Australia isn’t.
Dear reader, I believe the Aussie banks are taking the opportunity to recapitalise.
In other words, Aussie banks are bumping up the coffers to protect themselves when years of dodgy loans finally rear their ugly heads.
Why 1% matters
International funding costs have gone up. That’s how the majority of banks are justifying their rate increases.
And that is true.
The bank bill swap rate (BBSW) is currently 0.5% higher than the 1.5% cash rate set by the RBA. This is the short-term lending rate our banks are charged by the wholesale funding pool.
What this means, though, is that major banks are paying around 2% to borrow internationally. That’s much higher than the RBA rate.
One viewpoint — which has persisted since the royal commission — is that the banks would rather absorb higher costs than risk aggravating the public further.
And that may very well be NAB’s take. The ‘goodwill’ public relations exercise.
But here’s the problem with that.
Not only will NAB’s position likely fail to last – the bank leaves itself dangerously exposed to increasing costs.
Right now, most major banks in Australia are increasing the ‘buffer’ between their costs and what they charge people.
Check this out.
Source: Reserve Bank of Australia
Prior to the financial crisis, major banks in Australia worked with a 2% cushion.
That is, they made sure that what they charged the customer was roughly 2% higher then the cost of providing the loan.
However, since the RBA has cut rates, the major banks haven’t followed suit.
Not every rate cut from the RBA was passed on in full.
As a result, the spread between what the banks charge the customer and the cost of the loan has jumped to almost 3%.
Furthermore, I anticipate this buffer will continue to grow.
I don’t believe the RBA will raise rates until at least 2020, and a rate cut isn’t out of the question before then. But that’s a topic for another day.
The RBA not increasing the cash rate will increase this buffer. In addition, as international banking costs increase, major banks are highly likely to continue raising rates for customers.
This, believe it or not, is a good thing for you.
Preparing for the worst
You just need to ignore what’s being said by the mainstream media to understand it.
The mainstream media outlets — and even our own prime minster — are telling us the banks are out to rob us blind. Raising rates when the RBA isn’t. Feeding on the ‘greedy’ bank narrative.
But it’s important to remember that the banks are the keepers of your cash.
You trust them with your savings. The biggest asset you’ll ever own — your house — is indebted to them.
Chances are, most of your wealth is wrapped in a bank.
Which is why we need our banks to be profitable.
We need to be able to take our cash out of the banks in an emergency.
The financial crisis was exactly 10 years ago this week.
Remember the queues around the block in Ireland as people tried to withdraw money from Northern Rock bank? Would you like to be stuck in that queue? Hoping that by the time you reach the front, there’ll be enough in the vault for you to be able to withdraw your money?
My point is, the Aussie banks aren’t out to rob you blind.
It’s an easy, lazy jab from the mainstream to make banks the villains right now.
In reality, the Aussie banks are raising rates to protect themselves in the event of a crisis.
They are bumping up the coffers through mortgage rate increases.
The Aussie banks are recapitalising.
When it comes time to take your money out, you’ll be thankful.