Westpac outdoes RBA, competitors

Following the Reserve Bank’s decision to cut interest rates by 0.25 percentage points to a new record low of 2.5% yesterday, NAB (ASX: NAB) and Commonwealth Bank (ASX: CBA) both matched the central bank whilst Westpac (ASX: WBC) decided to go even better, lowering its mortgage rate by 0.28 percentage points.

Until yesterday, Westpac’s 6.26% mortgage rate was significantly higher than those offered by its competitors, which ranged between 6.13%-6.15%. As such, the bank was under pressure to lower its rates after it was revealed that 0.7% of its market share had been lost over the last 12 months as a result.

In a bid to regain some of that market share (or, at very least, as an attempt to stop further share being lost), Westpac has now lowered its rate to 5.98%.

Westpac’s decision to cut rates by a higher margin than the RBA reflects CEO Gail Kelly’s confidence that the home loan market will soon pick up with lower interest rates on offer. For the 6 months ended June, the bank grew mortgage rates by just 1.9%, as compared to the 3% recorded for the market.

Although higher rates were giving her bank higher profit margins in the short term (it was estimated that Westpac could have lost $250 million in profits by reducing its rate simply to match competitors), the bank will want to be at the forefront as the home loan market starts to pick up.

Whilst the RBA cited moderated commodity prices and below average growth for its decision to slash the cash rate, others have cautioned that the move was “undesirable and dangerous” due to Australian housing already being expensive by most metrics.

Foolish takeaway

The decision by Westpac could impact profitability in the short term as it receives less interest on loans, but as its market share begins to pick up over the long term, it should prove to be a positive move for the company.

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

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