Australia and New Zealand Banking Group (ASX: ANZ) has become Australia's first big bank to lift its interest rates in response to the financial regulator's latest crackdown on lending.
In an announcement to the market on Thursday, Australia's third-largest bank by market capitalisation said it would increase its mortgage loans to property investors by 0.27% to 5.65% per annum (a 5.76% comparison rate), adding approximately $50 per month to a 30-year, $300,000 mortgage, according to my calculations.
At the same time, ANZ will also increase fixed rates for property investors by 0.30% whilst decreasing fixed rates for new owner-occupied home loans by up to 0.40%.
The bank's CEO of Australia, Mark Whelan, said "Although interest rates for residential property investors are at very low levels historically, the decision to raise interest rates for residential investment lending has been difficult but necessary in the current environment."
Why it's happening
Indeed, home prices have skyrocketed in recent years with the pressure being felt mostly in Sydney, and to a lesser extent Melbourne as well. In fact, the latest quarterly report from real estate advertising group Domain shows that Sydney's median house price topped $1 million for the first time in history, while Melbourne prices are nearing $670,000.
As a result of the low interest rate environment and booming property market, the nation's financial regulators have been growing increasingly concerned about the health of the financial system and recognised the need for Australia's biggest banks to be "unquestionably strong".
In response, the Australian Prudential Regulation Authority, or APRA, announced an increase in the amount of capital required to be held against residential mortgages by Australia's five largest banks which will see the average risk weighting increase from 16 per cent to "at least 25 per cent", requiring billions of dollars in capital to be raised.
Westpac Banking Corp (ASX: WBC) has already put a dollar figure on the amount it expects to raise at $3 billion, while ANZ believes it will need to raise $2.3 billion in capital. Estimates put the amount to be raised by Commonwealth Bank of Australia (ASX: CBA) and National Australia Bank Ltd. (ASX: NAB) at more than $3 billion each.
Indeed, these additional costs could come at the expense of shareholders in the form of lower dividends or capital raisings, while costs are also likely to be passed on to customers, just as ANZ announced it would yesterday. At this point, it is unclear how each of ANZ's rivals will go about raising the required capital.
In addition, ANZ also stated that the move was designed to help it achieve a better balance between owner-occupied and investment lending. To support this, the bank has recently introduced other measures to improve the lending mix such as a reduction on interest rate discounts for property investors, whilst also increasing the deposit required to at least 10%.
What this means for investors
Australia's largest banks have enjoyed an incredible six years since the depths of the Global Financial Crisis, and their shareholders have been well rewarded as a result. However, it is clear that the regulatory environment is now clamping down on the sector in recognition of the economy's enormous reliance on their strength and stability, making it tougher for the banks to continue growing earnings.
Although further gains are possible in the near-term, long-term investors ought to recognise the headwinds facing the sector which could seriously hinder the banks' ability to continue generating long term, market-beating returns.
