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Will NAB pass along higher rate cuts?

With loan funding costs stabilising and competition intensifying in the home loan market, Cameron Clyne, chief executive of the National Australia Bank (ASX: NAB), has suggested that he may cut mortgage rates out of sync with the central bank when the time seems appropriate.

According to Mr. Clyne on Channel Nine’s Financial Review Sunday program, the banks will be able to more comfortably pass on interest rate cuts to borrowers as funding costs continue to ease, and will not have to rely so heavily on the decisions being made by the Reserve Bank of Australia (RBA) to do so.

Clyne stated: “I think as we move into, hopefully, a more benign funding environment there will be that scope to do that”.

NAB, Commonwealth Bank (ASX: CBA) and Westpac  (ASX: WBC) all passed on the entirety of Tuesday’s 25 basis point cash rate cut to borrowers, whilst ANZ (ASX: ANZ) became the first bank since 2008 to cut its interest rate by a figure higher than that set by the RBA. Philip Chronican, ANZ’s Australia chief, stated that now that funding costs have started to ease, “it was about time that we started to share some of that with our customers”.

Since November 2011, NAB has only passed on 1.34 percentage points of cuts in comparison to the 2% cut to the nation’s official cash rate. As costs decline for the bank however, Clyne has marked it as a ‘possibility’ that they will decrease further.

As competition in the home loan market continues to intensify, lower costs for the banks should result in lower interest rates for customers, although that may not be seen for many months yet.

Last week, NAB released its half-year report, pleasing investors with a net profit increase of 23%, which was largely due to higher revenue from personal and wholesale banking.

Foolish takeaway

Whilst this comes as good news to people paying off mortgages, it is not so appealing to those with their cash in bank accounts – relying on the interest for income or long-term savings. Whilst analysts are still expecting one more rate cut for the remainder of the year, investors would be better off investing their money in shares of strong Australian companies paying generous dividends.

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More reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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