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Australian banks have come in for heavy criticism for suggesting they can no longer afford to pass on future RBA rate cuts.
But on closer scrutiny it is clear they have shouldered far more of the cost of funding than many realise.
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The cash rate may have fallen by 4.25 per cent since September 2008 but there is little relationship between the banks’ cost of funding and interest rates. The bank bill swap rate, credit spreads on long-term bonds and retail deposit rates have more of an impact.
Standard variable rates from the majors have ranged from 5.74 per cent from CBA and NAB to 5.91 per cent from ANZ and Westpac last month – a reduction of around 3.75 per cent since August / September last year.
In March CBA chief Ralph Norris said margins on home loans had fallen below the level considered “acceptable” and the bank may not be able to pass on future rate cuts “in their entirety”.
Steve Weston, general manager of distribution, broker platforms and lending at Challenger, told Mortgage Business that banks’ home loan margins had now fallen to around just 0.75 per cent.
Falling margins prompted Citibank to announce last month that it would take measures to reduce its volumes to ensure the bank “continues to operate profitably” into the future. Other banks are no doubt feeling the squeeze.
Goldman Sachs JB Were banking analyst Ben Koo said there had been a lot of political pressure on the banks to keep their rate cuts in line with the RBA.
“We have to remember that the banks have been the beneficiaries of the government’s guaranteed funds, so they’ve had to do their bit in return, so to speak,” he said.
But Mr Koo said this had become increasingly difficult with many banks’ long-term funding now rolling over and becoming much more expensive. He added that it was important the banks remained profitable to keep the economy viable.
“It’s not a bad thing to have banks that are profitable, compared to those in the US that were running very unprofitably,” he said.
“It’s sensible and it’s why our banks have not needed bailouts, unlike those overseas.”
