A leading economist has claimed that the central bank could be forced to cut interest rates if the majors are forced to hold additional capital.
AMP Capital chief economist Shane Oliver told Mortgage Business that increasing the risk weightings for the majors will curb their ability to lend, slowing down the market and potentially prompting further rates cuts in the future.
“It will slow down the majors’ ability to lend,” Mr Oliver said. “Then the RBA might feel that things might slow down too much, which would lead to further rate cuts."
While increased risk weights on mortgages will lead to each major bank holding up to an additional $20 million in capital, it does put them on a level playing field with the smaller lenders and creates a more competitive market, Mr Oliver added.
However, according to new research by Morningstar, the capital requirement recommendations of the Financial System Inquiry (FSI) final report are “very manageable” and unlikely to hurt the profitability of the majors.
“The David Murray-led Financial System Inquiry, or FSI, has issued its final recommendations, and the clear takeaway is the major banks need to increase capital,” Morningstar analyst David Ellis said.
“But, in our opinion, there are no drastic recommendations, and we expect the implications on future profitability, return on equity and dividends to be minimal.
“More importantly, we do not see a need for large near-term capital raisings,” he said.
“Based on our preliminary reading of the FSI report, the recommendations are benign and investors should not be overly concerned by the blanket media coverage.”
Morningstar played down the FSI hype, stressing that the inquiry has only made recommendations and it is up to the government to approve each, with APRA to decide on exact implementation of policies and timeliness in most cases.
Mr Ellis added that any changes will be implemented gradually.
The recommendation to increase minimum risk weights for mortgages to between 25 per cent and 30 per cent, adding about $13 billion to $20 billion of additional capital, is very manageable, he said, especially when phased in over several years.
“Considerable market analysis and media commentary assumed higher CET1 targets would be in addition to the impact of higher mortgage risk weights," he said.
“However, the final report specifies these two recommendations should be viewed together. This is a definite positive for the major banks.”
ANZ is expected to achieve the strongest net interest margin of the big four by 2019 at 2.18 per cent, according to Mr Ellis.
“Wholesale funding costs become more manageable, especially because of the move to monthly loan repricing,” he said.
Meanwhile, Morningstar has forecast CBA’s residential mortgage lending growth of 5 per cent in fiscal 2015, followed by 6 per cent to 7 per cent per annum in the subsequent four years.
“Net interest margins stabilise near 2.14 per cent in fiscal 2015, reflecting home loan repricing offset by lower wholesale funding costs, then gradually widen to 2.18 per cent in fiscal 2019,” Mr Ellis said in a research note.
While NAB’s net interest margin is forecast to be the lowest of the majors, stabilising at 2.05 per cent, Morningstar predicts Westpac’s net interest margins to average 2.13 per cent over the next five years.