There's been much talk about the 0.2% increase in variable mortgage interest rates Westpac Banking Corp (ASX: WBC) announced yesterday.
While the bank says the rate rise was due to increased capital requirements, some market commentators suggest the bank has snubbed customers to pay higher higher dividends to shareholders.
And by paying increasingly higher dividends to investors, management can hit their bonus targets by massaging the share price, or so the story goes.
Westpac says it expects to pay a final fully franked dividend of 94 cents a share, up 2 cents compared to the previous year, but if the bank is required to hold more capital, why is it paying out bigger dividends to shareholders?
Westpac also has a dividend reinvestment plan (DRP) in operation – allowing the bank to keep some of the dividends due to be paid out, and issues new shares instead. A DRP allows shareholders to take shares in place of cash.
Interestingly the DRP is not underwritten either – which would've added even more cash to the bank's balance sheet. An underwritten DRP effectively means that if shareholders choose to take the dividend as cash, the company will issue the shares to someone else, and use the cash it gets from them to pay your dividend.
As Westpac's chief executive, Consumer Bank, George Frazis said in the announcement yesterday,
"This is a difficult decision and one that is not taken lightly. We acknowledge that it does impact customers, even in an environment where interest rates remain near historic lows. We have sought to carefully balance the needs of our borrowers, depositors and our shareholders, as well as the competitive market we operate in."
But as we wrote yesterday, so few Australians will bother to switch banks to get a cheaper mortgage rate and Westpac knows it.
The bank is also raising the interest rate on some term deposits by 0.25%, which should be good news for the self-managed super fund (SMSF) army. That could see funds flow into the bank, further propping up its balance sheet.
The big debate now is whether the other three big banks Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA) and National Australia Bank Ltd (ASX: NAB) will follow suit.
The big four tend to stick together on big decisions, with only subtle differences, particularly when it comes to interest rate changes.
Foolish takeaway
Westpac mortgage customers have got the raw end of the deal here, with shareholders and depositors benefitting. The best revenge for homeowners might be to buy shares in Westpac, with the current dividend yield above 6%.
