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Australian Banks’ Rate Hikes Win Support

Australian Banks’ Rate Hikes Win SupportAustralian Banks’ Rate Hikes Win Support

Fund managers have backed Australia’s big banks in raising mortgage rates independently of the Reserve Bank, saying investors are not going to swallow lower returns from the sector simply because capital levels have risen.

All major banks have raised mortgage rates in the last two weeks and the healthy shareholder returns in banking are in focus amid debate over whether returns should fall because the sector is being made safer. Capital is a buffer for absorbing loan losses, so there is an argument that lifting bank capital should prompt investors to accept lower returns because they are taking less risk, NewsNow reported.

Treasurer Scott Morrison on Monday said major banks’ return on equity were “almost double” what European banks made.

However, fund managers argued the big four lenders–Commonwealth Bank, Westpac, National Australia Bank and ANZ Bank–faced a balancing act in meeting the needs of shareholders and regulators.

Goldman Sachs Asset Management’s head of Australian equities, Dion Hershan, argued it was too simplistic to say investors should accept lower returns from better-capitalized banks.

Hershan said there were many other risks facing banks than their amount of capital, which was not a significant source of concern.

“Getting banks to hold more capital brings down one element of risk, but it’s worth pointing out the risks that banks face, which we’re very comfortable with, are multifaceted. It’s not simply capital. It gets to loan quality, it gets to liquidity, so you really can’t take a one-dimensional view on this,” he said.

He argued the current rates of return earned by banks were sustainable and capital was an “input cost” that banks would seek to recover from customers.

“It’s no different from a retailer when wholesale good prices go up. It’s no different from a transport company when fuel prices go up,” he said.

Kate Howitt, portfolio manager in Fidelity’s Australian Equities Fund, said overseas investors that played a key role funding Australia’s financial system would not be convinced to accept lower returns by claims banks were being made safer.

Banks’ return on equity–a key measure of shareholder returns–had already come down from the levels before the global financial crisis, she said. This occurred while other risks were rising.

“You’re going to struggle to convince offshore investors that they’re getting appropriate returns for their risk, when they compare a lower level of return to elevated house prices and elevated levels of household indebtedness,” she said.

“There’s an imperative to provide above cost of capital returns if we want to continue to be net importers of capital,” she said.

The investment director at Investors Mutual, Anton Tagliaferro, said the banks’ mortgage rate hikes had been “encouraged” by the Australian Prudential Regulation Authority, which wanted to see “strong, profitable banks”.

Financialtribune.com