Westpac’s interest rate decision “expensive”

Some analysts are anticipating that banking group Westpac (ASX: WBC) could capitulate further on its variable mortgage rate, following its decision to slash its rate by 28 basis points compared to the 25 basis points that the Reserve Bank, NAB (ASX: NAB) and Commonwealth Bank (ASX: CBA) dropped their rates by.

The decision has been labeled as “expensive” — although Westpac was losing market share with its higher rate, it was still recognising higher margins as a result. James Freeman, from Deutsche Bank, as well as analysts from Credit Suisse, all agreed that the decision would impact the bank’s annual profits by 0.8%, or $54 million after tax.

Prior to the RBA’s rate cut to 2.5% on Tuesday, Westpac had a mortgage rate of 6.26%, compared to its competitors which all ranged between 6.13% and 6.15%. Due to the higher rate, the bank lost significant market share of 0.7% over the previous 12 months. However, Jonathon Mott, an analyst for UBS, estimated that despite the lost market share, it would cost Westpac roughly $250 million in profits for the year should it reduce their rate to meet competitors.

Mr. Freeman said “We would expect Westpac to continue to reduce its standard variable rate back to peer levels over time to help offset the market-share losses seen recently.”

As reported by The Australian, Jarrod Martin from Credit Suisse further stated that the bank may capitulate further, citing the success of Commonwealth Bank which limited its market share losses by cutting its advertised rate and through discounting.

Foolish takeaway

Westpac’s decision to outdo the central bank in its rate cut highlights CEO Gail Kelly’s confidence that the housing market will soon pick up with lower interest rates on offer. Although the bank could lose in excess of $50 million with its decision, it is also vital that they remain competitive with other banks as more applications for home loans are made.

Meanwhile, ANZ will announce its decision tomorrow as to how much they will reduce their mortgage rate by.

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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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