Interest margins charged by banks are at “extremely low” levels and should be widened to bolster the banking industry in difficult times, says the Australian Bankers Association (ABA).
“Increasing lending margins is one means of strengthening a bank’s balance sheet, although it comes at a potential cost the loss of market share,” the ABA said in a statement on Wednesday.
“Another means of strengthening a balance sheet is to cut share dividends.”
The ABA said that the overall margin between banks’ assets and liabilities had contracted since the credit crisis began in July 2007, and margins were extremely low by historical standards.
“Deposit rates are still high relative to their historical trend, and long-term funding is still very expensive,” the ABA said.
The ABA says home mortgage rates are at their lowest level in 44 years and rates on three-year fixed interest loans to businesses are at record lows.
The ABA was responding to recent reports by analysts that point to what they say are burgeoning margins on mortgages and corporate loans that will boost banking sector profits at the expense of consumers
The banking sector was criticised by the federal government last week for passing on less than half the Reserve Bank of Australia’s (RBA) quarter of a percentage point interest rate cut.
Lenders point to what they said where higher funding costs as the reason for not passing on the rate cut fully.
National Australia Bank did not pass on any rate cut at all.
This week Australian Competition and Consumer Commission (ACCC) chairman Graeme Samuel warned that it may block future bank mergers to guard against anti-competitive behaviour as banks’ profits rise.
Analyst reports by Goldman Sachs JBWere, Bank of America – Merrill Lynch, Credit Suisse, JPMorgan and Fujitsu Consulting showed the banks have profited from re-pricing mortgages, business loans and deposits.
They also say this beneficial funding gap will compensate for the rising cost of offshore wholesale funding.
Goldman Sachs JBWere said Australia’s major banks have expanded the spreads charged on standard variable rate mortgages – the margin between the interest rate charged to borrowers over the RBA’s official cash rate – since the credit crisis began.
Spreads on loans to corporations have swelled by between 200 and 500 basis points since the start of the credit crisis, Goldman’s Ben Koo and Elizabeth Rogers wrote in a note to clients.
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 own mortgage books.