Banks reap profits from extra margins

12/03/2010

Increases in major bank lending rates have more than fully offset the significant increase in their funding costs since mid 2007, according to the Reserve Bank of Australia.

A paper on bank funding costs and lending rates, prepared by four members of the RBA’s domestic markets department and released yesterday, reports that bank funding costs are “significantly higher relative to the cash rate” than they were in mid 2007 due to the increase in the cost of deposits and a shift in the banks’ funding mix to more stable (and more expensive) types of funding – deposits and long-term wholesale debt.

The RBA estimates that the average cost of the major banks’ funding is about 130 to 140 basis points higher relative to the cash rate than it was in mid 2007. The report says the major banks’ average interest rate on outstanding household and business loans is around 160 to 165 points higher, relative to the cash rate, than it was in mid 2007. It says: “Most of the increase in lending rates over the cash rate has been due to higher funding costs.

For the major banks, however, there has also been some widening in their lending margins.” The RBA says net interest margins are 20 to 25 basis points higher than pre-crisis levels. This analysis is at odds with statements made by bank chiefs at recent presentations. When CBA chief executive Ralph Norris presented the bank’s December half results he said the bank faced continuing funding cost pressure and that “the pressure is not going to diminish any time soon.” And when Westpac chief executive Gail Kelly delivered a December quarter update she said the bank still had additional funding costs that it wanted to pass through.

Source: Banking Day