Australia’s banks have protected their margins at the expense of business customers rather than home-buyers, during the global financial crisis, a report published by the central bank shows.

The report also found the major banks’ average net interest margin (NIM) - a main indicator of bank profitability - had risen recently, offsetting falls that occurred in the early stages of the crisis in mid-2007.

In the decade prior, the average NIM on the banks’ Australian operations had tended to decline by around 10 basis points (0.10 percentage points) a year, the Reserve Bank of Australia (RBA) report published on Thursday said.

This was partly due to tighter spreads on some loan products.

But it was also the result of changes in the composition of the banks’ assets toward lower-margin products, like housing loans, and increased use of capital markets for funding.

Since 2004, however, the rate of decline had slowed, indicating an end to a shift to lower margins.

In any case, the banks have now managed to turn back the clock, the report published in the RBA’s monthly bulletin indicated.

The average NIM had risen by nine basis points in the half year to March 2009, after rising by five basis point rise in the half year to September, the report prepared by Michael Davies, Chris Naughtin and Arlene Wong of the RBA’s domestic markets department said.

“The major banks’ NIM currently averages 2.27 per cent, which is a little above the level before the onset of the financial market turbulence in mid 2007,” it added.

The anxiety stemming from the financial crisis that erupted in mid-2007 had meant borrowers have had to pay bigger margins above official benchmarks to reflect higher perceived risks related to credit quality, duration of loans and market liquidity.

As a result, the banks’ failure to pass on all of the RBA’s official interest rate cuts, beginning early September 2008, had not been translated directly into wider interest margins.

“The recent financial turbulence means that, while the cash rate remains a key influence on banks’ funding costs, the costs of the various forms of banks’ funding have not fallen as much as the cash rate due to an increase in term premia and credit and liquidity spreads,” the report said.

Since the RBA started easing monetary policy in September, its target for the overnight cash rate has fallen by 425 basis points to three per cent, from 7.25 per cent.

By not passing on all of the official cuts, banks have restored their margins to their former glory, and it has been businesses - particularly small businesses, rather than households - that have borne the brunt.

The report said variable interest rates on small business loans had fallen by substantially less than housing loan rates, with smaller cuts in indicator rates and increased risk margins for some borrowers.

Spreads over the benchmark swap rate for fixed-rate small business loans had also risen, the report said.

“Overall, the weighted average cost of small business loans has fallen by 230 basis points since September 2008,” it said.

Interest rates on outstanding loans to big businesses had fallen more - by 350 basis points since last September - the report said.

This partly reflected a larger proportion of large business loans at variable rather than fixed rates, but also showed only some had been repriced to incorporate wider risk margins.

For business loans as a whole, the report said the decline in the average lending rate had been less than the decline in average funding costs.

“Partly, this is offsetting the fact that variable housing loan rates have fallen more than the cost of funds, but it also reflects some increase in risk margins,” the report said.

“It is estimated that the major banks have reduced their variable housing lending rate by an average of 385 basis points since September 2008.

“This is less than the reduction in the cash rate of 425 basis points, but more than the reduction in their average funding costs of 330 basis points.”

The report used data extending until the end of May.

Since then, most major banks have announced increases in their home loans rates, citing higher funding costs.

AAP