SYDNEY: Australia and New Zealand Banking Group (ANZ) is raising interest rates on loans for homes bought for investment purposes just days after tough new capital rules were unveiled, in a move that other lenders are likely to mirror.
The Australian Prudential Regulatory Authority (APRA) announced on Monday that banks should have cash reserves equal to 25% of mortgage books by July 2016, up from 16% now.
ANZ’s move also follows increasingly stern warnings from APRA to keep annual growth in investment home loans to below 10% and tighten standards on products such as interest-only loans.
“We think you’ll see more of this,” said CLSA analyst Brian Johnson, referring to the rate hike.
ANZ has the weakest tier-I capital ratio, a core measure of a bank’s financial strength, of the major four banks at 8.9 percent as at end-March. That ratio stands at 10 percent for National Australia Bank and 9.5 percent for Westpac Banking Corp.
“The decision to raise interest rates for residential investment lending has been difficult but necessary in the current environment,” ANZ Chief Executive Officer Mark Whelan said in a statement.
Home loans account for 40% to 60% of the major banks’ total loans. Home loans to investors have outpaced growth in owner-occupied loans in recent months, and now account for a third of the A$1.5 trillion ($1.15 trillion) home loan market, regulatory filings show.
Deutsche Bank expects return on equity (ROE) at major banks, including ANZ, to fall by about 90 basis points on average, as a result of the new capital rules, if they do not reprice their mortgage books.
ROEs for the major banks range from a low of 11.76% for NAB to 18.7% for Commonwealth Bank of Australia .
Effective Monday, ANZ’s variable residential investment property loan index rate will rise by 27 basis points to 5.65%. Fixed rates for new investor home loans will also increase by up to 30 basis points, it added.
Fixed rates for new owner-occupied home lending will be reduced by up to 40 basis points, the lender said.
“If banks were to maintain their overall profitability on housing we’ve estimated that they would have to increase the variable rates by something like 55 to 65 basis points,” said CLSA’s Johnson.
