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Bank profits tipped to take a hit to lure new customers

Bank profits tipped to take a hit to lure new customers

(8 August 2013 – Australia) Australia’s banks rushed to pass on the full 25 basis point rate cut after the Reserve Bank of Australia (RBA) decision on Tuesday to cut the cash rate to 2.5 percent.

The reduction in interest rates is likely to drag on bank profits however, as deposit accounts also become less profitable.

An aggressive move to cut mortgage rates by Westpac, which lowered its mortgage rates by 28 basis points, showed there is more competition among lenders to sign up new customers, which could also drag on profits.

With mortgage credit growing at less than half the pace at which it expanded before the global financial crisis, banks are trying to entice customers with lower standard variable rates or discounts as part of package deals.

Households have also been more reluctant to take on more debt, with reports showing there has not been a strong bounce in borrowing during the latest cutting cycle, pressuring banks to offer customers better deals.

Analysts have said Westpac, which has the highest standard variable mortgage rates of the big four and has been losing market share, may need to make further cuts to its mortgage rates if it is to raise its growth rate.

Low-interest rates are also a function of a weaker economic climate, which can squeeze bank profits if it results in a sharp increase in the number of borrowers who go into default.

The unemployment rate rose to 5.7 percent in June, but the government's economic statement last week predicted it would climb to 6.25 percent this financial year, which would be the highest jobless rate since September 2002.

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