Profit stopped banks from passing on full rate cuts: ACCC

The report was commissioned following criticism of the banks from Treasurer Josh Frydenberg for their failure to pass on the RBA’s full 25 basis point cuts to the cash rate in October 2019.

The interim report therefore considers interest rates paid by home loan customers and how major banks decide what to charge on variable rates, as well as overall trends in home loan pricing, the influence of the cost of funds on home loan interest rates, and how easy/difficult it is for borrowers to understand their rates and fees compared to market.

The ACCC particularly focused on how the banks treated the RBA’s rate cuts in June, July and October 2019 (however, the cash rate has since been reduced another two times – in early March and again in mid-March, as the RBA pulled its emergency lever).

Profit is driving consideration

Building on the findings from the ACCC’s Residential Mortgage Inquiry – in which it accused the major banks of “synchronised” pricing behaviour and opaque pricing tactics – the key finding of this report was that “maintaining profits was a major consideration for the big four banks as they weighed whether to reduce mortgage rates in line with Reserve Bank of Australia cash rate cuts during 2019”.

Profit was “central” to their decisions to not always fully pass through the lower rates to mortgage customers, the ACCC said.

The report reads: “The big four banks balanced a range of factors when making their headline variable rate decisions following the cash rate reductions in 2019. The relative weight given to each factor varied by bank and month but, in most instances, a key consideration for the banks was maintaining their profitability against internal benchmarks. It was in this context that the banks balanced the interests of different stakeholders, including, for example, home loan customers and deposit customers.”

However, the commission noted that given the low interest rate environment during the price monitoring period, the banks had anticipated profit reductions because of their limited ability to reduce deposit rates in the event of reductions in the cash rate.

Other considerations when making their headline variable rate decisions included “community expectations and the public’s reaction”. Indeed, the ACCC suggested that this resulted in some of the banks reducing their headline variable rates by more than they might have otherwise. 

While the report acknowledged that the big four banks did reduce their headline variable rates following the cash rate reductions in June, July and October 2019, the ACCC added that the changes to the big four banks’ headline variable rates only came into effect between nine and 21 days after they announced a rate change (depending on the bank). This delay therefore resulted in additional revenue (compared with if the rate changes were effective immediately).

Speaking of the findings, ACCC chair Rod Sims said: “The banks were attempting to shore up their profitability during a period of low interest rates.

“It was their strong preference, after the RBA’s cuts, not to further reduce the rates customers were earning on some deposit products as they approached zero per cent.”

“The banks’ reluctance to cut these deposit rates led them to anticipate lower profits, which they aimed to recover by not always fully passing through cash rate cuts to their mortgage customers,” Mr Sims said.

The ACCC’s analysis also found that, while headline rates for owner-occupier home loans with principal and interest repayments fell overall during 2018 and 2019, the banks’ funding costs fell even more over the same period.

The big four banks therefore “benefitted from a sustained decrease in their funding costs during 2019”, the ACCC suggested. 

“We recognise that much has changed in the economic and funding environment since last year. The COVID-19 pandemic has shifted priorities, and the banks are playing an important role in supporting the economy,” Mr Sims said.

“However, the inquiry findings shed an important light on bank decision-making and raise questions about whether the banks could, at the time, have passed on a higher proportion of those RBA cash rate cuts to their mortgage customers.”

Comparison confusion

The ACCC’s Home Loan Price Inquiry interim report also shows that although average interest rates charged by the big four banks on home loans fell during 2019, a lack of price transparency and higher interest rates for existing loans continued to cost customers.

The topic has been the subject of contention for several years, with the banks having last year doubled down in defence of their mortgage pricing decisions after being accused of profiting off a “loyalty tax” imposed on customers.

The report suggests that rates did not accurately reflect the price that most big four bank customers actually paid for their home loans, because the overwhelming majority of customers received discounts, including opaque discretionary discounts.

For example, an owner-occupier with a principal and interest mortgage of $386,000 could save about $5,000 on interest payments in the first year if they went from having no discount to receiving the big four banks’ average discount of 128 basis points, the ACCC said.

At the end of September, customers with new owner-occupier loans with principal and interest repayments were paying, on average, 26 basis points less than customers with existing loans. The difference was usually even more significant for customers with older loans.

The ACCC also found that home loan pricing practices continue to make it difficult for consumers to compare different mortgage products.

“Given the economic disruption, uncertainty and job losses stemming from the COVID-19 pandemic, many consumers may not be inclined to shop around and ask for discounts from their banks right now,” Mr Sims said.

“However, our analysis shows how that even a small further reduction in interest rates could potentially save thousands of dollars over the life of a mortgage. Consumers should consider this carefully when it is time to re-engage with their lender.”

The report does not make mention of mortgage brokers or their ability to negotiate or help borrowers navigate the mortgage landscape. It does note, however, that the Australian Securities and Investments Commission’s (ASIC) MoneySmart mortgage calculator will shortly be enhanced to include information on average interest rates for new loans across borrower and repayment types. The enhanced calculator will use weighted average interest rate data collected from all ADIs (including banks, building societies and credit unions) to provide consumers with a benchmark against which they can compare offers from lenders or their current interest rate.

The ACCC’s final report, scheduled for release later this year, will consider barriers to consumers switching to alternative home loan suppliers.

[Related: Big bank CEOs deny ‘loyalty tax’ accusations]