Westpac says borrowers could face undersized interest rate cuts as credit for banks becomes more expensive because of rising wholesale funding costs.
Westpac chief executive Gail Kelly on Wednesday flagged that undersized rate cuts by banks were likely in 2012 even as the Reserve Bank of Australia (RBA) continued to loosen the monetary screws.
Banks were unlikely to pass on in full any further rate cuts by the central bank in the face of escalating funding costs caused by the European debt crisis, she said.
“We’ve seen some of it during the global financial crisis as banks have moved a greater amount or different amount at different times from changes in the cash rate,” she said. “I think we are going to see more of that.”
Westpac’s decision last week to pass on the full RBA rate cut was “finely balanced”, Mrs Kelly told Westpac’s annual general meeting in Sydney.
Europe’s escalating debt crisis has caused stress in global debt markets, pushing up the cost to local banks of raising money in term debt markets, from which the big four banks source about 20 per cent of their funds, analysts say.
Mrs Kelly on Wednesday said term markets around the world were effectively closed.
When they reopened, Westpac expected the cost of raising funds would climb higher than during the global financial crisis, she said.
However, Westpac would be able to meet borrowers’ demand, thanks to its strong in retail deposits that funded 63 per cent of loans in fiscal 2011, she said.
Over the past three years banks have argued that the rising cost of funds has forced them to pass on official interest rate rises in full, or pass on oversized rate increases to claw back their margins.
RBA governor Glenn Stevens last week said the spread between the cash rate and major home loan rates had risen by around 100 basis points since 2007 because of this trend.
He said this had caused the RBA to try to offset this with a lower cash rate than what it otherwise would have been.
Mrs Kelly told the Westpac AGM that she applauded last week’s decision by ANZ Bank to delay its future responses to the RBA’s interest rate decisions on the basis that the cash rate had little influence on banks’ cost of funds.
“The cash rate has got a very tenuous connection with the actual setting of bank prices.
“Those are much more driven by term funding in offshore wholesale markets.”
Retiring Westpac chairman Ted Evans said the consequence of not being able to break the nexus between the cash rate and banks’ lending rates would be a weakening of the local banking system.
Interest rates will be set by the market rather than the central bank, he told shareholders at the meeting.
Mrs Kelly said that global market volatility was continuing to weigh on revenue from Westpac’s markets and treasury business, and caused a two per cent fall in institutional banking revenue in fiscal 2011.
A Westpac shareholder called into question Mrs Kelly’s $8.6 million annual remuneration package and called for Westpac to expand its four-director remuneration committee to include shareholders.
Asked if Mrs Kelly considered cutting her salary in order to keep jobs scheduled to be cut as part of Westpac’s productivity agenda, incoming chairman said the chief executive’s pay was based on what the board believed was the right thing for Westpac.
