James EyersSenior Reporter

Mar 3, 2020 – 2.44pm

Major bank share prices fell sharply after political pressure forced the banks to pass through the Reserve Bank’s 25 basis point emergency cash rate cut in full, delivering a blow to earnings.

Westpac, Commonwealth Bank, National Australia Bank and ANZ Bank all moved to provide their mortgage customers with full relief after the Reserve Bank cut the cash rate to a new historic low of 0.5 per cent. Westpac and NAB also passed the 25 basis point cut through to business customers.

Westpac’s David Lindberg said that while the right decision was made, pricing changes were “increasingly challenging” as the cash rate approaches zero. Alex Ellinghausen

Analysts had been expecting the banks to hold back some of the cut given acute pressures on net interest margins, because almost 25 per cent of all deposits are already at or near zero rates.

Bank investors are also starting to fret about banks facing higher funding costs if economic risks continue to rise.

In the hour before the RBA cut, all of the major banks were trading higher on the ASX, with Westpac up 1.7 per cent. As soon as Westpac responded immediately to the RBA, announcing it would slice its variable home loan rates by the full 25 basis points and also reduce rates on small business cash-based loans and overdrafts by the same amount, the banking sector did a dramatic U-turn.

At the close, Westpac had slumped to finish down 1.1 per cent at $22.94, Commonwealth Bank closed 1.7 per cent lower at $79.11, ANZ ended the session down 1.4 per cent at $24.00, while NAB also finished 1.4 per cent lower at $24.13.

Uday Cheruvu, portfolio manager at PM Capital, said bank CEOs had very recently been indicating their ability to pass through full rate cuts was limited because of increasing regulatory and funding costs.

“So this cut by the major banks is a bit unexpected, and a headwind,” he said.

“I think the bigger issue for the banks is that if the rate cut is due to increased economic risks, then their historically low credit cost levels are likely to go up. That will have a bigger negative impact on their earnings than the pass-through of the current rate cuts.”

The dramatic response came after Prime Minister Scott Morrison urged the banks at a lunchtime press conference to “do the right thing by Australians” and pass a cut on in full.

It was the first time the major banks had responded to an RBA rate cut by passing it on in full since February 2015.

Banks ‘fulfilling community expectations’

The heads of consumer banking in all of the major banks issued statements pointing to the seriousness of the COVID-19 outbreak, and their bank’s recognition that community expectations required them to support both customers and an economy grappling with uncertainty brought by the coronavirus.

Westpac’s chief executive of consumer banking David Lindberg said the bank recognised the virus “will have a direct impact on our nation’s economy”.

“We want to provide additional support to our small business and home loan customers at this unprecedented time.” he said.

At NAB, chief customer officer for consumer banking Mike Baird said the bank had considered the “unprecedented challenges” of the low interest-rate environment, the impacts of the bushfires and coronavirus outbreak on its customers and “the broader economy”.

Angus Sullivan, head of CBA’s retail bank, said there is a “unique set of circumstances facing the country”. 

Angus Sullivan, CBA’s group executive of retail banking services, said CBA had “examined the important role we play in supporting the Australian economy and the unique set of circumstances facing the country”.

Meanwhile, ANZ’s group executive for Australian retail and commercial banking Mark Hand said the bank “is prepared to play its role in supporting both our customers and the broader economy through this period of uncertainty”.

ANZ said it would cut the standard variable rate for property investors paying interest only by 35 basis points, more than the official cut.

CBA said its business loan pricing remains under review.

Analysts may downgrade earnings for the major banks in the coming days, given the squeeze that record low interest rates is creating.

Morgan Stanley said the major banks have more than $400 billion of deposits with interest rates below 0.25 per cent – about a quarter of all Australian deposit balances. These can’t be reduced further, to compensate banks for lower rates being charged to borrowers.

“While this is the right decision, pricing changes are increasingly challenging as the cash rate heads towards zero,” Mr Lindberg said.

“We will continue to review our rates on a case-by-case basis taking into account the diverse range of stakeholders and factors which influence the cost of funding.”

Economic contagion

Analysts are also revising their bank ratings due to the potential for higher impairment charges for loans to sectors most exposed to the virus.

Morgan Stanley said the tourism, eduction, retail and wholesale trade, construction, manufacturing and mining industries account for about 10 per cent of total bank loans in the major banks.

However, the investment bank also pointed out that lower rates will “improve loan serviceability”, and may increase demand for housing loans.

“We would expect in the short term that any virus disruption impacts would more than offset this, particularly if they resulted in labour market weakness,” said Morgan Stanley analyst Chris Nicol.

“But once the virus concerns abated, this could see house prices rebound to a higher equilibrium.”

Mortgage brokers said the official rate cut is likely to further drive up housing prices, which had already started to rise before COVID-19 struck.

“A record low cash rate means a sustained period of low interest rates will continue to stimulate the housing market, worsening housing affordability in the nation’s largest markets, Sydney and Melbourne,” said Mortgage Choice CEO Susan Mitchell.

Prime Minister Scott Morrison, in a media conference two hours before the Reserve Bank decision, pointing to the example of Qantas as he called on the banks to “do the right thing by Australians” and pass on any cut in full.

“There is no doubt that if the [Reserve Bank] were to take a decision today on cash rates, that the government would absolutely expect the four big banks to come to the table and to do their bit in supporting Australians as we go through the impact of the coronavirus.”

Westpac said its lower rates would take effect in two weeks, on Tuesday, March 17. NAB and ANZ said their changes would take effect four days earlier, on March 13, while CBA said its changes would take effect on March 24.

RateCity.com.au said Westpac’s move will save its average home loan customers $55 a month and $662 a year, while CBA’s average customer will save $58 a month and $691 a year.

“This decision from the big banks will put pressure on the other lenders to follow suit and pass the cut on in full to new and existing customers,” said Sally Tindall, research director at RateCity.com.au.

Before the RBA’s rates decision, Prime Minister Scott Morrison said he would expect the big four banks to “come to the table”. Alex Ellinghausen

Mr Morrison said on Tuesday that of the 75 basis points reduction in official rates since the last election, 70 basis points had been passed through to consumers. He said that customers of banks that had not passed the rates through in full should shop around.

“So while not all of those rate cuts were passed on by the banks – and you know my view on that – I applaud Australian consumers are taking matters into their own hands and making sure that they get a better deal,” he said.

Athena Home Loans, a new home loan lender competing against the majors, said it was the only lender to have immediately passed on the full rate cut for the past four RBA rate cut announcements.

“If [your bank] doesn’t drop your rate in full, then drop your bank,” said Athena co-founder Nathan Walsh. “The savings opportunity is too important to be short-changed.”