Westpac benefiting from higher rate

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.

Interested in our #1 dividend-paying stock? Discover The Motley Fool’s favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of “The Motley Fool’s Top Dividend Stock for 2013-2014.”

More reading

Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

The 5 mining stocks we’re recommending in 2019…

For decades, Australian mining companies have minted money for individual investors like you and me. But if you believe the pundits and talking heads on TV, those days are long gone. Finito! Behind us forever…

We say nothing could be further from the truth. To earn the really massive returns, you’ve got to fish where others aren’t fishing—and the mining sector could be primed for a resurgence. That’s why top Motley Fool analysts just revealed their exciting new research on 5 ASX miners they believe could help you profit in 2019 and beyond…


The best way we see to play the global zinc shortage… Our #1 favourite large-cap miner (hint: it’s not BHP)… one early-stage gold miner we think could hit the motherlode… Plus two more surprising companies you probably haven’t heard of yet!

For free access to our brand-new research, simply click here or the link below. But be warned, this research is available free for a limited time only, and we reserve the right to withdraw it at any time.

Click here for your FREE report!