Borrowers for houses should expect the hits to continue. CLSA analyst Brian Johnson says major banks could re-price up all housing loans – including owner occupied – by between 0.55 and 0.65 percentage points, an amount that would maintain group return on equity that otherwise would be lost from the Australian Prudential Regulation Authority's decision last Monday to increase housing risk weights to a minimum 25 per cent from July next year.

For bank shareholders, the outcome of last week's repricing is positive, as net interest margins (NIMs) – key drivers of bank profit – are fattened up after being squeezed in recent years by the forces of competition.

The action by ANZ and CBA would also have been applauded at the top end of Martin Place, where the RBA has been under pressure to protect the economy in a low-interest-rate world, which has resulted in the Australian dollar remaining higher than desired levels.

"We believe the banks could contribute to dampening some of the RBA's 'low rate financial stability' concerns by repricing mortgages," says Macquarie analyst Mike Wiblin. "This would help margins, slow loan growth and allow the RBA to take rates lower, helping bank share prices too."

Low interest rates have also been propelling house prices in Sydney and Melbourne to dangerous levels as property investors have tried to catch the wave. CBA's group executive for retail banking services, Matt Comyn, said on Friday that at an industry level, investor lending approvals remain 22 per cent higher than the level of a year ago, while recent data points to over 50 per cent of new home loan approvals being for investment purposes.

Stevens gave green light

Wanting flexibility to weaken the Australian dollar but not wanting any rate cuts to inflate the housing bubble, RBA governor Glenn Stevens on Wednesday effectively gave the green light for banks to price higher. In the Q & A after his lunch-time address to the Anika Foundation, he said nobody should find it surprising or controversial if banks started to raise rates, given that the recommendation of the financial system inquiry that led to APRA's action was focusing on altering the competitive landscape between the majors and smaller banks.

"You can't do that unless some process adjusts," Stevens said. "I imagine it will result in some rise in mortgage rates from the major banks. It is supposed to – that's the point."


ANZ moved the next day. APRA chairman Wayne Byres also endorsed banks maintaining strong return on equity in his speech to The Australian Financial Review's Banking & Wealth Summit in late April.

Traditional banking economics teaches that raising loan rates will boost margins in the short term, but this may dampen mortgage growth as market share is given up to banks that maintain lower rates.

Yet traditional banking economics may need to be cast aside, given that the so-called macroprudential action by APRA to cap the growth rates for lending to investors is having the effect of restricting competition.

"While in a normal competitive environment repricing changes may potentially lead to customer attrition, in this instance we believe the regulator has essentially removed that risk," says CBA's German.

Because the banks are already growing investor lending at around 10 per cent, their ability to attract customers from one another is severely limited, as new customers will push them over the caps. As Bank of America Merrill Lynch analyst Andrew Hill observed last week, after ANZ's move but before CBA's: "If peers do not follow ANZ's lead, they will likely gain more share and once again exceed the 10 per cent speed limit."

The potential for borrowers to shop around has effectively been curtailed by the caps. APRA has said the consequences of operating above the caps could be even more capital.

Nor are landlords likely to have an abundance of credit opportunity from the non-bank financial sector – as APRA's investor lending caps are also being enforced against non-bank lenders by the Australian Securities and Investments Commission.

Analysts are now predicting what the bank repricing means for the rest of the sharemarket. CLSA's Johnson says the move will give flexibility to the RBA to cut the cash rate up to 75 basis points to weaken the Australian dollar should it wish to without making the housing bubble bigger. That would be positive for stocks with offshore earnings, and possibly points to a lower Aussie 10-year bond. Macquarie Group would be a big winner, he said.


Analysts say Westpac Banking Corp and the regional banks are also big potential winners from landlord loan repricing, given their overweight position to investment lending.

It also seems that last week's moves are just the beginning. Goldman Sachs analyst Andrew Lyons estimates the repricing of ANZ's domestic variable rate investor lending book will increase cash earnings by around 2 per cent. But to offset the valuation impact of this additional $13 billion to $24 billon of common equity tier 1 (CET1) capital, he estimates the major banks would need to increase their margins by 12 to 22 basis points. "Therefore, the repricing announced by ANZ is only a fraction of this requirement," Lyons says.

CBA's earnings will be lifted by 2 to 3 per cent from its move on Friday, while NAB could gain 1 to 2 per cent and Westpac 3 to 4 per cent should they follow suit, according to BOAML's Hill. All up, the big four banks' combined profits would be boosted by almost $800 million.

For the regional banks, the returns would be even larger: earnings could go up 4 to 5 per cent for Bendigo and Adelaide Bank, and 5 to 7 per cent for Bank of Queensland, if they also move.