I have always said it is better to be a shareholder of a bank in Australia rather than a just customer, particularly if you have an SMSF. This point has been reinforced over the past couple of weeks when almost in tandem, the Big Four increased rates out of cycle with the Reserve Bank. ANZ and CBA increased investor loan rates by 0.25%, Westpac increased by 0.27% and NAB applied a 0.29% increase across all their interest only loans. This was in response to new regulations requiring banks to hold more capital to support mortgage lending and to reduce systemic risk by boosting their balance sheets.
The measures to curb property investment lending will be a cost to the banks and more regulation like this is on the way. However, their response clearly shows the banks will move quickly to protect profit margins by passing the cost of the regulations on to their customers. This also probably signals the low mortgage rate party in Australia is coming to a close, unless the Reserve Bank decides to cut again.
The shareholders of banks will not be too concerned, particularly if they are relying on dividends to fund a living in retirement. Bank shares have produced great returns for investors over the years and still do, Westpac is trading on a dividend yield of 5.4%, which is 7.7% with franking. In an environment where term deposit rates are 3%, the appeal is obvious. However, growth going forward will be difficult so expect the banks to do more to protect their margins. This could be via more out of cycle rate increases and a renewed focus on cutting costs like reducing staff.
Even with the challenges of low growth and increased regulation ahead, I’m still a supporter of holding the banks in a portfolio. They have dominant market positions and pricing power to be able to pass on costs. That said, as most Australians are indirect bank shareholders through their superannuation, it is in everyone’s interest to make sure our banks remain profitable and safe.
Rob Gilmour is the Managing Principal of Wealth Simplicity. The information provided should not be considered personal financial advice as it is intended to provide general advice only. The content has been prepared without taking into account your personal objectives, financial situations or needs. You should seek personal financial advice before making any financial or investment decisions.