Higher rates cover banks from credit crunch losses

by Richard Kilner

Story link: Higher rates cover banks from credit crunch losses

Australian Treasurer Wayne Swan recently urged banks not to raise interest rates above 12 basis points.

However, his warning has fallen on deaf ears as Suncorp became Australia’s fifth bank to raise its variable rate, instigating an increase of 15 basis points to a rate of 8.72%.

Other banks have increased rates even more, such as ANZ and St George who both added 20 basis points to their variable interest rate.

St George’s small deposit base has left it more vulnerable than most to the credit crunch, with costs rising by 30 basis points. This leaves scope for a second rate hike, as the full cost increase has yet to be passed on to the customer.

NAB and CBA have both made smaller increases, prompting speculation that they may have to increase rates again later on.

However, banks which have made only slight raises to their rates could see customers move to them, in an effort to avoid the more punitive rates of their competitors.

Industry analysts believe that the rate hikes will be able to cover the losses incurred from the US subprime mortgage crisis.

James Ellis, senior analyst at Credit Suisse, has said that prior to interest rate rises bank earnings could decrease by up to 5%.

Since the rate hikes have occurred Credit Suisse now puts the potential earnings risk at just 0-2%.

Ellis believes that the top priority for banks currently is market share, rather than profit margins.