Bank Eyes Long-term Interest Pressure
Sydney Morning Herald
Tuesday September 11, 2007
AUSTRALIAN interest rates will continue to come under pressure and may have to rise if the current volatility in global credit markets goes on for many more months, the head of Westpac bank warned yesterday.
While the country's third-largest bank had no immediate plans to raise rates for home owners and companies outside those set by the Reserve Bank, the chief executive officer of Westpac, David Morgan, said the bank was "closely watching" developments in the longer term.The possibility of a rate increase would depend on how long the credit crunch - caused by the subprime housing loans crisis in the US - continued and whether this would tip the North American economy into recession, Dr Morgan told a conference of banking analysts and investors in Sydney yesterday.The nature of the financing squeeze meant it was difficult for Westpac to judge just yet whether it was a temporary blip or if it marked a more structural change that would alter the long-term attitudes of companies and investors to lending, he said.It could take three to six months before the situation became clearer, Dr Morgan said. Asked if he thought it was cyclical or temporary, Dr Morgan responded: "We have to resist the temptation to forecast the unforecastable."Nonetheless, he said, the problems caused by the effective shutdown of the short-term commercial paper finance market that had been the source of cheap financing for many non-bank lenders in Australia had already prompted a "flight to quality" by investors and companies.As a consequence, domestic banks such as Westpac were well placed to take advantage of the difficulties faced by specialist mortgage and commercial lenders, given that borrowers had "no appetite" for the more exotic loan products previously offered.Assessment and pricing of risk had come back into fashion, he said, which favoured the major banks with their vigilant approach to lending and their conservatively geared balance sheets. At the same time, they would be able to offer funding to businesses and investors that had dried up elsewhere, thanks to their high liquidity and diverse sources of financing. Dr Morgan also indicated the bank's earnings for the current financial year were unaffected by the recent troubles.Westpac sought to assure the market yesterday of its minimal exposure to the global credit crunch although it has small funding commitments with an American mortgage bank that has about $120 million of subprime loans on its books.Other loans have been made to Australian fund managers that have investments of $425 million in the wider US market.It also backs a current stand-alone financing operation called Waratah, which raises short-term financing backed by higher-quality prime mortgages. Waratah has $6 billion now outstanding but continues to have access to funding.But if Westpac had to take the business on to its own balance sheet, the bank internally would face a slightly higher cost of interest.
© 2007 Sydney Morning Herald