The major banks are supercharging their profits at the expense of customers. Their funding costs have fallen, not risen, as they claimed when refusing to pass on Reserve Bank interest rate cuts.
Their action has hurt not only mortgage holders but savers, small businesses and all other bank customers, according to research by Milind Sathye, a former central banker and now professor of banking and finance at the University of Canberra.
Professor Sathye has debunked claims that the banks’ high cost of funding has forced them to hold back rate cuts.
And former Reserve Bank governor Bernie Fraser said the big banks had room to cut their mortgage rates, but had failed to do so because they had put profits first.
Professor Sathye said the three main sources of bank funding – deposits, long-term debt and short-term debt – had become much cheaper in recent years, even as the banks had claimed they were rising.
Since November 2011, the Reserve has lowered the cash rate by 1.75 percentage points to 3 per cent. But the banks dropped their mortgage rates by only 1.36 percentage points to the standard variable rate of 6.42 per cent. That means almost a quarter of the Reserve’s cuts – billions of dollars’ worth – has gone into the banks’ coffers.
Professor Sathye cites the online savings account interest rate easing from 7.3 per cent in July 2008 to 3.05 per cent in January this year, a 4.25 percentage-point fall.
Term deposits fell from 7.95 to 4.25 per cent in the same period, a drop of 3.7 percentage points as the Reserve’s cash rate came down further, from 7.25 to 3 per cent. But as the drop in interest paid by banks is smaller than the drop in what it charges, their profit has increased.
That shows up in the profit figures. The pre-tax combined profit of the big four banks was $22.6 billion in 2008 and $33 billion last year, a jump of 46 per cent.
All eyes will be on the banks this week if the Reserve Bank moves the cash rate on Tuesday.
Professor Sathye’s analysis concludes that the greatest threat to bank profitability has come not from external funding pressures or from competition, but from a blow-out in operating costs.
His findings follow a report from UBS Investment Research last week that said the banks were in such a ”purple patch” that they risked government intervention if they did not start making their own mortgage rate cuts outside the Reserve Bank cycle.
”Banks are now making more money from originating a mortgage than any time previously,” UBS analyst Jonathan Mott wrote.
Last month Commonwealth Bank delivered a $3.8 billion net profit for the half-year. This put the big four – Commonwealth, Westpac, ANZ and National Australia Bank – comfortably on track to surpass their collective bottom-line profit of $25 billion last year.
It also endorsed Commonwealth’s sharemarket valuation, which shot through $100 billion in the new year, further polishing the reputation of Australia’s banks as among the most profitable in the world – and arguably the safest.
Professor Sathye, a former central banker in India, said this sharemarket performance ”is coming out of the pocket of somebody … and that somebody is the Australian borrower”.
Even though people and business are borrowing less since the global financial crisis and despite the rise in the banks’ operating costs, profits have risen because of lower funding costs and fattening credit ”spreads” – the difference between what banks pay for money and what they charge for it when they lend.
“The majors continue to make record profits and at the same time harp on about high funding costs to justify their higher lending rates,” Professor Sathye said.
Deposits are the single largest source of bank funding. They contribute just above 50 per cent of funding, according to the Reserve Bank. The Australian Bankers Association has argued that competition for deposits has pushed up the interest rates on them.
But Professor Sathye says deposit rates have fallen. In fact, they had declined more sharply than lending rates, meaning funding costs had dropped, not risen.
“So [it’s] not just the mortgage holder but all bank customers who are suffering,” he said.