Earlier this month, Westpac Banking Corp (ASX: WBC) shocked the market when it announced it'd raise the interest rates on some of its home loans by a meaningful 0.2%.
In standard oligopolistic fashion, Commonwealth Bank of Australia (ASX: CBA), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd. (ASX: NAB) also upped their variable mortgage rates. Between the 'Big Four' banks, which are believed to control 84% of the Australian mortgage market, home owners and investors could expect interest rate rises anywhere between 0.15% and 0.2%.
The banks blamed new rules from the banking regulator, APRA, as the catalyst to raise customers' rates and sell billions of dollars of new shares to investors over recent months. However, as I explained here, the current rules imposed on the Big Four banks versus the smaller regional banks create an unfair advantage. In essence, the big banks have been able to lend more than double the amount of loans compared to their smaller rivals.
Levelling the playing field
In addition to an expected slowdown in credit markets and the broader economy, which will hurt the banks' record profits; Bank of Queensland Limited (ASX: BOQ) and Bendigo and Adelaide Bank Ltd (ASX: BEN) will become more competitive.
At 5.56%, ANZ claims to have the lowest variable mortgage rate of the major banks. However, according to Mortgage Choice Limited's (ASX: MOC) website, variable rates offered by other lenders are as low as 4.01%. At these rates, mortgagees won't wait around too long to refinance their loans.
Lower returns ahoy
The Big Four banks have achieved excellent returns over the past two decades as household debt levels ballooned to record highs on the back of plummeting interest rates. However, there is a growing consensus that shares in the big banks won't be as lucrative in future years.
"The total return won't be like the last couple of decades," Contango Asset Management's Chief Investment Officer, George Boubouras, told the Australian Financial Review. "The regionals and the majors – the ROEs are going to converge – and therefore there is upside in the ROE in the decade ahead at the regionals."
Foolish takeaway
Despite their recent falls, over the next three to five years, I believe the risk for big bank shares continues to be to the downside. Indeed, rising bad debts, lower profitability, slowing credit markets and increased competition doesn't bode well for record profit growth.
