Bank Spreads Have Increased By 35 Basis Points

Continuing our analysis of bank margins, we have updated our industry model, with the latest funding and product data. At an aggregate industry level, we see that the average home lending rate has remained static (because whilst there are substantial discounts for new loans, the bulk of the back book has not seen any rate reduction) since 2013. The RBA last reduced their cash rate in August 2013, and the benchmark rate has remained static since then.

NetMarginDec2104However, savers have see their returns falling thanks to deposit repricing initiatives. Between September 2013 and now, the average deposit return has dropped by 35 basis points. As we explained, banks are less reliant on deposits, and can get cheaper funding from other sources (and the recently announced QE in Europe will make funding even cheaper).

So, despite the fact that the banks are unlikely to be able to reduce their provisions much further (as they did last year) to bolster profits, and their increased capital requirements, the highlighted net increase in margins bodes well for bank performance, though at the expense of borrowers, who are not enjoying rate reductions, and depositors who are seeing their interest rates continuing to fall.

Whilst Bank Margins Improve Significantly, Most Households Do Not Benefit

Using the updated RBA chart pack data, we can see the movements in deposits, lending and funding, all elements impacting bank profitability and their customers. We see that funding costs are down, deposit returns are down, whilst headline lending rates are static. This is creating an opportunity for banks to discount selectively to attract target housing lending. Looking in more detail, margins on personal loans have increased, with no change to the average rate since 2012, despite the fall in funding costs and the target rate since then. Average mortgage rates have not changed since September 2013, again despite falls in funding costs. Deposit rates have been falling recently as can be seen from the chart. Small business lending rates are still very high. This is creating significant profit for the banks.

Bank-MarginsIn addition, wholesale bank funding costs are lower than they have been since 2007, and we are even seeing improvements in the costs of securitisation, as well as debt based funding. We recently published an update to our series on mortgage discounting, and we highlight again the wide range of margins available depending on the particular transaction involved. Large home loans, and investment property loans appear to attract the biggest discounts. Small business on the other hand find it hard to get any reduction in interest rates.

DiscountJun-Range Those with the capacity to switch have the potential to negotiate quite a discount, but those unwilling or unable to switch are unable to take advantage of the lower rates, so continue to be locked into high rates, which flow direct to the bank’s bottom line. And remember, according to the BIS, we have some of the most profitable banks in the western world. Clearly competitive tension is insufficient to drive down margins for most households. I will be interested to see if the current Financial Sector Inquiry discusses the question of completion in banking as it looks to me to be a major issue, which is costing Australia Inc, dear. Banks were quick to put their rates up when needed, but the reverse is not true.