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ANZ joins battle for mortgages with rate cut

ANZ (ASX: ANZ) has today decided to pass on the Reserve Bank of Australia’s full rate cut to mortgages.

The ANZ joins the Commonwealth Bank (ASX: CBA) and National Australia Bank (ASX: NAB) who have already passed on the 25 basis points. Westpac (ASX: WBC), which for some time has had the highest rates on home loans, went one better and passed on a 28-basis-point cut earlier this week. Westpac’s market share of mortgages has dropped 0.7% over the past 12 months.

ANZ’s rate cut has come at a time when business leaders have called on our banks to start doing more for the economy. Former NAB boss and BHP chairman Don Argus told The Financial Review that the big four are “more like giant building societies now than like banks”.  He said the massive size of the home-loan books put out economy at risk because they should be stimulating the economy through business loans, “if your banks aren’t supporting business initiatives to create growth and jobs, then you finish up like Europe” Mr Argus said.

The banks’ reliance on home loans could pose a threat not only to the economy but to their share prices as well. When Europe’s banks began purchasing US mortgage bonds before the GFC, everything was golden but when the bubble popped it all turned pear-shaped. Currently the ANZ and NAB have the lowest market share of the banks whilst the Commonwealth and Westpac control 26.9% and 24.9% respectively.

Currently interest rates are at their lowest point since 1959 and it’s putting pressure on banks’ earnings. Westpac chief, Gail Kelly, today warned that businesses need to brace for low growth and interest rates as consumer confidence continues to be challenging.

Mr Argus commended ANZ CEO Mike Smith for his company’s performance in Asia and said “I think Mike is doing a pretty good job”. The banks position in international banking will see it perform better from a slowdown in the economy compared to its rivals.

Foolish takeaway

Despite the low interest rates, investors looking to benefit from high yields in bank stocks should heed the warning signs. Low interest rates and a tough economy make short-term earnings for banks and for our two biggest, long-term growths is looking weak.

Low interest rates are good for home owners but investors need to be careful of inflated prices as investors flee from term deposits into stocks that have well-known brands. 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.”

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Motley Fool contributor Owen Raszkiewicz owns shares in ANZ.

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