UPDATE 1-CBA resists lowering rates in full as cuts squeeze Australian banks' margins

Paulina Duran


* NIM could fall by up to 25 bps as rates move to zero -analyst

* Analyst estimates net interest could fall by about A$8.4 billion

* Impact to depend on extent of benefits passed to borrowers

* CBA first to resist passing on full rate cut to customers (Updates with CBA reaction to the rate cut; changes slug)

SYDNEY, Oct 1 (Reuters) - Australian banks' net interest margins will be hurt by Tuesday's cut in interest rates to an unprecedented low of 0.75% and any further central bank action to stimulate the economy, analysts said.

The Reserve Bank of Australia (RBA) earlier lowered its benchmark cash rate by another quarter-point from 1% in an attempt to kick-start the economy amid sluggish mortgage demand, putting further pressure on banks' profits.

"This sustained very low interest rates environment will weigh down on net interest margins and hence bank earnings power," said Matthew Wilson, a senior banking analyst at Evans & Partners.

Net interest income for the four largest banks, which dominate about 80% of the deposit and house lending market, could fall by about A$8.4 billion ($5.66 billion) if the central bank moved rates to zero percent, Wilson estimated.

The final impact would depend on a number of other factors including how much of the benchmark rate cut is passed on to customers and banks' interest rate hedging techniques, with the official cash rate widely expected at 0.5% by early next year.

"The RBA now has only three, or possibly even fewer, more conventional cuts available to them before they will have to venture into unconventional monetary easing territory -- negative rates, QE (quantitative easing), or bond yield targeting," ING's chief Asia-Pacific economist Rob Carnell said.

UBS analyst Jonathan Mott said that despite the expected pick-up in lending from lower rates, the banks' "fundamentals are increasingly challenged with ultra-low interest rates."

"The benefit to bank revenues would likely be offset by NIM pressure given the rate cuts required to re-stimulate the housing market," he wrote in a note to clients on Tuesday.

Commonwealth Australia Bank, Westpac Banking Group , National Australia Bank, and Australia and New Zealand Banking Group (ANZ) have resisted public pressure to fully pass on the past two central bank rate cuts to customers.

CBA become the first of the Big Four to defy a call from national Treasurer Josh Frydenberg to pass on the full cut to mortgage customers, saying it faces a "difficult balancing act." That raises questions about the potential effectiveness of super easy monetary policy.

"It is the government's expectation that the banks will pass on this 25 basis point rate cut in full," Frydenberg had earlier told reporters in Sydney.

CBA, Australia's top lender, said instead it would cut its standard variable owner-occupier interest rates, a key gauge, by 0.13 percentage points.

Although they remain some of the most profitable banks worldwide, Australia's Big Four reported a combined profit of A$14.5 billion for the first half of their financial years, down 4% from a year prior, as they were hit with sluggish credit growth and billions in remediation costs from wrongdoing.

The fall was also partly driven by a 11 basis point reduction in net interest margins, the difference between the rates paid and charged for money lent by banks, to 1.95%.

As the cash rate falls towards zero, it gets harder to reduce deposit rates to offset the cheaper mortgages they must now offer borrowers, while also losing on lower investment rates.

If rates moved to zero percent, NIM margins could shrink by as much as 26 basis points, Evans & Partners' Wilson said. The calculation excluded all other factors, he added.

($1 = 1.4839 Australian dollars) (Reporting by Paulina Duran in Sydney, additional reporting by Nikhil Kurian Nainan in Bengaluru; Editing by Catherine Evans)