By Sonali Paul and Paulina Duran
MELBOURNE (Reuters) - The Australian government has ordered the competition watchdog to investigate why banks failed to pass three official interest rate cuts this year in full, less than a year after a public inquiry exposed the industry for cheating customers.
The Australian Competition and Consumer Commission (ACCC) has been asked to investigate prices charged for residential mortgages by all lenders and how they make pricing decisions, including passing on changes in the official cash rate by the central bank.
The inquiry will also look at differences in prices paid by new and existing customers and barriers that may deter customers from switching lenders.
Australia's Big Four lenders dominate about 80% of the country's A$1.7 trillion ($1.15 trillion) residential mortgage market. They remain some of the most profitable banks in the world, but their earnings fell last year after facing low credit growth and billions of dollars in remediation costs from wrongdoings exposed by the wide-ranging Royal Commission inquiry.
The ACCC is due to deliver its preliminary report by March 30 and a final report by Sept. 30, 2020.
Treasurer Josh Frydenberg said the government needs information on the banks' funding costs to understand why they are not passing on rate cuts in full, after the Reserve Bank of Australia (RBA) said those funding costs have dropped.
The RBA has cut the official cash rate by 0.25% three times so far this year to a record low of 0.75% in a bid to stimulate consumption and investment in a slowing economy.
In response, Australia's "Big Four" lenders - Australia and New Zealand Banking Group (AX:ANZ), Westpac Banking Corp (AX:WBC), National Australia Bank (AX:NAB) and Commonwealth Bank of Australia (AX:CBA) - have cut customer's mortgage rates by about 0.57%, on average.
"The government and the RBA itself have called on the banks to pass them on and the banks have just ignored that advice and that call," Frydenberg said in an interview on Australian Broadcasting Corp television.
Frydenberg said he had spoken to bank chief executives about the inquiry and told them this was an opportunity for them to "clear the air" to explain why they haven't passed on rate cuts in full and how they balance the needs of customers and shareholders.
However, Frydenberg said the government would not resort to levying a tax on banks if they refuse to pass on rate cuts in full and has previously ruled out legislating for the banks to pass on rate cuts in full.
MARGIN PRESSURE
A sustained ultra-low interest rates environment is weighing on bank's interest margins and analysts contacted by Reuters on Monday said bank earnings would drop if they were forced to pass on lower rates.
"We believe that this will put more pressure on the banks to pass through a larger proportion of ... any further RBA movements," UBS analysts wrote in a note to clients.
"This would further exacerbate the net interest margin, return on equity and dividend pressure the banks are facing in an ultra-low rate environment."
CBA, the country's largest bank, said in a statement the inquiry is an "opportunity to gain a deeper understanding of how Australian banks are operating in a historically low interest rate environment."
Smaller rival ANZ said the inquiry would be a chance "to provide facts" to customers about how their home loans are priced. NAB echoed CBA's comments on the challenges of ultra low interest rates, while a spokesman for Westpac did not return requests for comment.