Claims by the banks that higher funding costs have prevented them from passing on recent interest rates cuts have been shot down by analysts who point to burgeoning margins on margins and corporate loans.

The major banks came under heavy criticism from the federal government last week after they passed on less than half the Reserve Bank of Australia’s (RBA) quarter of a percentage point cut in interest rates.

National Australia Bank (NAB) passed on no reduction at all. Like the other banks, NAB cited higher wholesale funding costs for its decision.

An analysis, by brokers Goldman Sachs JB Were, and separately by Bank of America Merrill Lynch, says the banks will pocket the amount of interest rates not passed on as extra profit.

Their analysis comes as the Australian Competition and Consumer Commission (ACCC) warns it may block any further bank mergers on anti-competition grounds.

Goldman Sachs JBWere said the major banks have expanded the spreads charged on standard variable rate mortgages - the margin between the interest rate charged to borrowers over RBA’ overnight cash rate - since the credit crisis began in 2007.

Analysts Ben Koo and Elizabeth Rogers said spreads have widened to 276 basis points over the cash rate compared to 182 basis points spread in December 2007.

“This implies a 94 basis points spread expansion benefit for the banks through out-of-cycle pricing,” they said in a note to clients.

Spreads on loans to companies have swelled between 200 basis points and 500 basis points since the start of the credit crisis, they said.

Bank of America - Merrill Lynch said in a note to clients that a further improvement in margins charged to institutions, small to medium enterprises and higher mortgage margins should help offset wholesale funding costs.

“Although the roll-through of structually higher wholesale debt pricing is a headwind, this will be offset by product margins (particularly commercial and housing lending),” Bank of America - Merrill Lynch’s Matthew Davison, Andrew Lyons and Nicole Mehalski wrote.

Comments from the brokers follow similar research by Credit Suisse of a beneficial funding gap created by the big banks since July 2007 as the size of their deposits overtook the size of their domestic loan books.

JPMorgan and Fujitsu Consulting’s latest joint report on the mortgage industry showed banks’ attempts to stamp out competition by depriving businesses of the full benefits of the RBA’s rate cuts in order to subsidise their mortgage books.

Australia’s major lenders have been at pains to stress that rising wholesale funding costs in offshore bond markets have become an impediment to passing on all of the RBA’s 425 basis points in cuts to the cash rate since September.

They claim that maturing three- and five-year term funding is now much more expensive to roll over in offshore debt markets.

Commonwealth Bank head of retail products Michael Cant has said the cost of funding had ballooned to 140 basis points over the 90-day bank bill rate compared to 20 basis points paid before the credit crisis.

ACCC chairman Graeme Samuel was reported in The Australian Financial Review on Tuesday as saying the waning role of non-bank institutions in the market had eased the way for the major players to engage in tacit co-ordination on pricing.

University of New South Wales business law lecturer Michael Peters said that unless second-tier banks and non-bank institutions could find a niche , they would have difficulty competing with the big banks which could raise cheaper money more easily because of the same regulatory framework applying to all authorised deposit-taking institutions.

“It cheaper to raise $1 billion than it is to raise $1 million because of the regulatory framework,” he said.

“When you’re the CBA you can do $1 billion quite easily, but when you’re the Qantas credit union, or Bank of Queensland (BoQ) or Suncorp, that’s a big ask,” he said.

BoQ last Thursday blamed rising term and retail funding costs for its 25 per cent cut in both first half 2009 net profit and its interim dividend.

BoQ chief executive David Liddy called for a uniform fee for all banks accessing the federal government’s wholesale funding guarantee.

AAP