Appearing before the House of Representatives Standing Committee on Economics in Canberra on Wednesday, Westpac CEO Brian Hartzer explained that 50 per cent of the major bank’s mortgages are interest-only (IO).
“So, half of people who have a mortgage with Westpac are only paying interest, they are not paying back any of the principal?” asked committee chair David Coleman, MP.
“That’s not the way I would put it,” Mr Hartzer replied. “They have the ability to pay interest-only but they also have offset accounts and make principal payments either in bulk or they hold equity in the offset accounts. The amortisation of interest-only accounts is roughly similar to the amortisation of someone who has structured the product as principal and interest. People do that for tax reasons and they do it to manage their cash flow.”
Mr Coleman said Westpac currently has the highest portion of IO loans among the big four. Mr Hartzer admitted that the portion was “significant”.
The size of Westpac’s interest-only mortgage book is significant indeed, as Mr Coleman grilled Mr Hartzer over the bank’s decision to lift rates on all IO loans by 34 basis points in June.
Mr Hartzer explained that the bank was “unclear” about APRA’s 30 per cent cap on new lending when it was first introduced in March this year.
He said: “At the time the requirement was brought in, which was a goal we needed to meet by this quarter, it was based on the net flow of mortgages, not just the new loans. Our understanding at the time was that it wasn’t just [on] the new loans being written,” he told the committee.
“APRA has subsequently clarified that. Subsequent to the original announcements. At the time it was unclear. It took a number of months for them to clarify.”
Mr Coleman then asked Mr Hartzer why the bank decided to increase rates on IO loans, rather than simply making sure that only 30 out of every 100 loans written were interest-only.
The Westpac boss took the opportunity to defend IO lending as the “giant credit issue” he believes the media has painted it to be.
“This has been picked up in the press as if it is some giant credit issue. And it’s not a giant credit issue. It is an economic issue about the resilience of the economy for the future. Secondly, it is about making sure both bank balance sheets and consumers have a cushion and that it is the right time for consumers to be paying down their loans when interest rates are at 50-year lows.
“One option we have is to simply stop lending. That is an option. Our view is that is not the best option for customer choice.
“We felt the pricing mechanism was a better way of achieving the requirement and ensuring customers get a choice”
Committee chair David Coleman MP noted that Mr Hartzer had not mentioned the profit impact of the rate hike. He went on to cite a number of analyst reports from Macquarie and Morgan Stanley the encouraged investors to overweight Westpac stock as they believed the bank would profit from differential pricing.
“I’m telling you the truth,” Mr Hartzer said. “That the primary driver was to meet the APRA requitement while preserving choice for consumers.”
According to Mr Coleman, upwards of 800,000 Westpac customers were affected by the June rate hike. With the ACCC now looking into the pricing decisions of the banks, the committee chair asked whether Westpac calculated the profit impact of APRA’s 30 per cent cap, given half of the bank’s book was interest-only.
Westpac CFO Peter King said: “We would have modelled an impact on our profitability of the changes.”
Chief executive Brian Hartzer defended the bank’s decision to lift rates, telling the committee that “pricing is a judgement. We don’t run the bank with a simple calculation and a spreadsheet. It was not a mathematical formula. It was a judgement.”
During Westpac's appearance before the committee, ASIC announced that Australia's major banks have cut back their interest-only lending by $4.5 billion over the past year. However, other lenders have partially offset this decline by increasing their share of interest-only lending.
[Related: ASIC to review loan files of high-IO brokers]