Sub-prime crisis 'could mean rate hikes'

But it's the customers of some of non-bank competitors, like RAMS Home Loans Group Ltd, who are the most likely to suffer, Commonwealth Bank of Australia chief executive Ralph Norris says.

Australia's second biggest bank reported a healthy rise in annual earnings on Wednesday to about $4.5 billion, and says a strong Australian economy means it is set to deliver more profits to its shareholders this financial year.

But the bank will have no qualms about hiking the rates on its lending products, if the knock-on effects of the US sub-prime mortgage crisis bites into profit margins.

The sub-prime fallout has caused by borrowers in the US with poor credit histories defaulting on their loan repayments, and the buck hasn't stopped with the US lenders that issued the loans.

Big investment banks that invested in sub-prime debt have also been hit, leading to a rise in borrowing costs across the globe and sizeable falls in stock markets.

"The fact of the matter is the price of credit in the market internationally has risen, so there will, at some stage, be some increase in rates," Mr Norris said.

"In regard to the level of those increases, non-bank lenders are going to be in a situation where they're going to have to pass on significantly greater increases than a bank like us."

In Australia, non-bank lenders have tried to distance themselves from the sub-prime fallout.

Wizard Home Loans says it has no pressing need to lift its rates because its loans are backed by global corporate giant General Electric.

But Aussie Home Loans concedes lending rates could rise, as higher costs of borrowing are passed on.

"The cost of money has increased not yet significantly enough to push us and banks and others to increase our interest rates on normal mortgages," managing director John Symond said.

"But you've got to be honest with consumers and say there's a thunderstorm brewing here, it could turn out to be quite aggressive.

Potentially making matters worse, Mr Norris believes the current strength of the local economy means official interest rates are likely to rise soon anyway, even though they went up just a week ago.

The Reserve Bank of Australia last week raised official rates to 6.50 per cent, from 6.25 per cent, and economists say there could be another rise by the end of the year.

Mr Norris also said the chance of a US-style mortgage meltdown in Australia is close to non-existent.

"In Australia, the whole market is operated much more conservatively than in the US, so I don't see any parallel of any significance between what's happened with the sub-prime market in the United States."