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Bank’s rate hike triggered by ‘severe’ rise in funding costs: CFO

The chief financial officer of an Australian bank has claimed that the lender had no choice but to hike interest rates on its mortgage products in order to offset the “substantial effect” of continually high funding costs.

Speaking to Mortgage Business, the chief financial officer (CFO) of Auswide Bank, Bill Schafer, attributed the lender’s decision to lift interest rates on its mortgage products to the sharp rise in the bank bill swap rate (BBSW).

“Our funding costs have risen significantly in the last four months,” Mr Schafer said.

“The BBSW — the 30-day rate and the 90-day rate — has had a large effect on our wholesale funding lines, and they’ve increased by between 30 and 35 points since the beginning of March, so that’s had a substantial effect on our net interest margin.

“We’ve been trying to absorb that across that period of time, with the hope that those costs would be relieved and the BBSW rates would decline, but now we’re nearing the end of the fourth month, we’ve taken the decision that the impact on our net interest margin is too severe, and unfortunately we needed to do an out-of-cycle rate increase.”

However, in minutes from its June board meeting, the Reserve Bank of Australia (RBA) claimed that “slightly higher funding costs for banks appeared to have had little effect on mortgage rates”.

In response to the RBA’s claim, Mr Schafer said: “I can tell you that a third of our funding across our whole book comes from these wholesale funding lines, and as they’ve increased by 30 points, and north of that, across the four months, we’ve seen a significant impact on our return, on our net interest margin, and therefore, on the return to the bank.”

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Further, the Auswide CFO noted that other banks, particularly non-majors, could also be prompted to make out-of-cycle interest rate increases if funding cost pressures persist.

“I’m sure we’re not alone in this situation, and other banks we suspect have been, as we have, sitting on these costs and absorbing them for four months — particularly the smaller banks and medium-sized or regionals would be watching the market.

“Once there’s a realisation that the cost can’t be absorbed indefinitely, it may well be that other institutions will move on their costs and their interest rates and have out-of-cycle increases. 

“We’re certainly going to watch the funding costs, and we, like everyone else, hope that there’ll be some relief in them. But at this stage, there’s no indication that that’s going to happen any time soon.”

Mr Schafer also called on the government and financial regulators to explore initiatives that would help “level the playing field” in the banking sector, claiming that smaller lenders are disproportionately disadvantaged by the “rafts of regulation” imposed on the industry.

“I think as a smaller bank, we often call out, and continue to do so, that the playing field needs to be levelled,” the Auswide CFO said.

“There have been some attempts to level the costs of capital, but we still find ourselves at a disadvantage there because of our scale. It makes it very difficult to compete with the big players in the banking industry.”

He concluded: “We would like to see the regulators continue to look at competition and try and level the playing field. With the enormous rafts of regulation that are coming through, it’s very difficult for a smaller bank to absorb [changes] in the same way that larger banks do, so it’s got to be on the agenda from our point of view.”

[Related: RBA flags tighter credit as rates remain on hold]

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