Although Westpac (ASX: WBC) has lost significant market share of the mortgage market due to its higher home loan interest rate, the corporation is reportedly banking an additional $250 million in profits by maintaining the higher rate.
Currently, Westpac's mortgage rate is 6.26%, which compares to Commonwealth Bank's (ASX: CBA) 6.15%, and the 6.13% offered by ANZ (ASX: ANZ) and NAB (ASX: NAB). Over the last 12 months, the bank has lost around 0.7% of its market share, which comes despite the bank's offering of a significantly lower rate for borrowings of over $250,000.
Although the bank is growing its mortgage business at 60% of the pace of the broader market – and losing around $36 million annually in profits as a result – a report by analysts at UBS has shown that the bank would in fact lose around $250 million in profits by lowering its rate to meet ANZ's and NAB's offering of 6.13%.
However, with experts predicting that the RBA will drop the official cash rate to 2.5% in August, many in the industry are questioning how long Westpac will be able to sustain the higher mortgage rate. After all, whilst the company may be raking in more money in the short term, it cannot risk losing too much market share or damaging its reputation.
When the cash rate was cut in May by 0.25 percentage points, ANZ made headlines by cutting its rate by 0.26 percentage points. Meanwhile, NAB also confirmed that it would consider cutting its rate out of sync with the central bank as funding costs dropped. Westpac, on the other hand, has argued that funding costs are again on the rise so a rate cut is not viable.
UBS analyst Jonathon Mott said "unless reputational damage begins to impact other areas of the bank, the economics of cutting the standard variable rate simply to stop market share losses don't stack up."
Foolish takeaway
Over the last 12 months, Westpac has delivered shareholders the most significant gains. Despite its shares falling away in recent months as investors took their profits, the bank still presents as a very expensive option for your portfolio.
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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.
