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Can the big banks get an earnings upgrade from mortgage repricing?

The move to increase mortgage rates by Bank of Queensland Limited (ASX: BOQ) has caught many off-guard and prompted some to ask if the big banks will follow suit.

A repricing of mortgages would give a nice earnings uplift to the big four that includes Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd. (ASX: NAB).

While the share prices of the big banks are up 0.2% to 0.5% as the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) defied a big fall on Wall Street overnight to trade 0.3% higher in morning trade, investors shouldn’t get too excited about a potential upgrade cycle.

The fact is, the big boys may be too anxious to lift rates even though they could be justified in doing so given that global funding costs are trending upwards.

It’s a wasted opportunity to win their way back into investors’ good books given that Morgan Stanley estimates that a 10-basis point (bp) increase in mortgage rates will boost the big banks’ all-important net interest margin (NIM) by around 4bp.

“We believe that oligopoly pricing power has peaked with scrutiny into conduct and competition and the potential for adverse outcomes from the Royal Commission, the Productivity Commission and the ACCC making it difficult for the major banks to contemplate re-pricing in the near-term,” said Morgan Stanley.

“The potential for re-pricing could rise if 2H18E margin decline is worse than expected and the risk of an adverse political and regulatory response has reduced.”

But if you thought the bank earnings risks are to the upside, think again! There is probably a bigger risk that our nation’s largest mortgage lenders could see their earnings cut as consensus forecasts have not fully priced in the recent increase in bank funding costs.

What’s more, the earnings pressure could intensify if we see competition in term deposits, according to Morgan Stanley.

I think a term-deposit market share war could be already brewing. I recently went into my bank (one of the big four) and was offered a special term deposit rate that was only available in branch and not online.

I won’t be surprised if the other big banks have similar behind the scenes deals, so if you are hunting around for better rates for your excess cash, it might be worthwhile popping into a branch to see if there is a secret menu option.

The share prices of bank stocks may be on the recovery path after a brutal sell-off, but I wouldn’t be adding any positions to this sector as I think there are still several headwinds that will need to pass before I become more bullish on the sector.

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, National Australia Bank Limited, and Westpac Banking. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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