Australia’s major banks may have made a strategic blunder when they used their Term Funding Facility finance to offer highly competitive fixed-rate mortgages, not reckoning that large numbers of their existing borrowers would refinance and drive down margins.

Macquarie Securities said in a research paper published this week that the banks underestimated the “second order” effects of existing customers switching. It said that around 5 per cent of the big banks’ existing mortgage balances switched from variable rates to more attractive fixed rates in the September half-year.

This has resulted in margin reductions of between four and 10 basis points, with Westpac the most affected and ANZ the least.

“We expect the flow-on impact will result in an additional five to nine bps headwind in 2021/22, with Westpac and Commonwealth Bank most impacted,” Macquarie said.

“Incorporating our analysis into our forecasts leads to a 2 to 4 per cent downgrade to 2021/22 earnings per share, with a smaller impact in 2023/24 as the market readjusts to a variable rate mix.”

Macquarie has cut its 2021/22 cash EPS forecast for Westpac by 4.4 per cent, ANZ by 3.8 per cent, CBA by 3.5 per cent and NAB by 2.4 per cent.

Macquarie said one positive for the banks was that the reduced front book to back book margin gap that resulted from the refinancing will mean less churn in future.

Fixed-rate mortgages as a proportion of the big banks’ total mortgage balances grew from between 15 and 20 per cent in the years between 2017 and 2020 to more than 30 per cent in the September half-year.

Fixed-rate mortgages as a proportion of new lending rose to 57 per cent in NAB’s case during the half. For Westpac it was 52 per cent, for ANZ 49 per cent and for CBA 44 per cent.