Westpac Banking Corp’s [ASX:WBC] share price fell 8.23% in trading last week, after reporting less than expected interest rate margins in its latest reporting.
Westpac reported a net interest margin (NIM) of 2.06% for the third quarter of 2018, in comparison to 2.17% for the first half of the year.
The major bank’s shares are currently trading at $27.66, not far from its five-year low of $27.30 in June this year.
Why is Westpac’s share price slipping?
After revealing its primary revenue generator dropped, it’s no wonder investors pulled back.
Low NIM’s, being the difference between what a bank pays to borrow money and what it lends it at, is currently a wide spread issue for banks. Due to the fact that the major banks have had to keep mortgage rates low, and even discounting rates on loans in order to gain market share in a crowded market.
As reported by ABC, traditionally a bank would simply increase rates on their home loans to recover any decline in NIM, however the state of the current market makes this too difficult to do.
In addition to the bad news on margins, Westpac is currently facing a lawsuit, regarding a breach of responsible lending laws. The Australian Securities and Investments Commission (ASIC) is suggesting that Westpac failed to properly assess whether lenders had enough money to pay back a loan.
What do bad margins mean for Australians?
It’s no secret that low-interest rates are a drag on a bank’s profit. And while Westpac might have gained market share with low interest rates, it has sacrificed profitability! And logically, this will eventually be passed on to consumers via higher mortgages.
Although it is unclear as to when interest rates will rise, it is only a matter of time before banks need to recover their losses.
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