Gouging by banks revealed
Scott Murdoch and Tim Boreham | April 13, 2009
Article from: The Australian
THE major banks are making $450 a year more from each average home mortgage today than before the global financial crisis as they exploit weaker competition from non-bank lenders.
The cash grab by big banks, revealed in an analysis conducted for The Australian, threatens to further increase tensions between the banks and the Rudd Government.
The banks have cried poor, declaring they cannot afford to pass on the full benefit of the Reserve Bank's latest 0.25 percentage point interest rate cut because they are suffering from increased costs.
The ANZ, Commonwealth and Westpac have cut mortgage rates by only 0.1 of a percentage point while the NAB has given mortgage holders nothing.
However, an analysis of bank funding costs by Fujitsu Consulting shows the banks have increased the profit margin on home loans over the past two years.
The major banks are making at least $450 a year more on the average mortgage now compared with two years ago, at the peak of the economic boom and when interest rates were higher.
The raised margin reflects reduced competition as the majors buy smaller competitors and non-bank lenders exit the market.
The banks are disputing the Fujitsu assessment. However, it increases the political pressure on the Government, which has been accused by the Opposition of being too close to the banks.
Calculations by Fujitsu Consulting show the profit margin on a $300,000 loan has increased from 0.8 per cent two years ago to 0.95 per cent. The increased profit margin has coincided with the banks' share of the home loan market surging past 90 per cent.
In the past year there were 125,000 new mortgages originated, which, based on an average loan and the increased profit margin compared with two years ago, means the banks have earned an extra $56.25 million from those mortgages alone.
Fujitsu's calculations were based on the net margin between a blended mix of funding sources for the major banks.
A recent report by Fujitsu and investment bank JPMorgan found that the cost to banks of raising money in Europe, one of the major markets for the institutions, has become significantly cheaper, by at least 0.5 per cent, in the past month.
"The banks have been more aggressive in reclaiming these higher funding costs to maintain profitability," analysts at JPMorgan said.
"Banks have already passed on considerable rate rises to both households and businesses."
The decision by Westpac, ANZ and the CBA to cut their standard variable rate by only 0.1 of a percentage point was expected to save the three banks $850million a year, they said.
"At the moment, on our calculations, the margins on the loans have increased and the reason for that was we had a lot of non-bank lenders in the sector," Fujitsu's Martin North said.
"When the non-banks disappeared, all the competition disappeared."
However, Fujitsu's findings were challenged by CBA and Westpac, the country's two biggest home lenders.
CBA spokesman Steve Batten said the $450 figure was "not consistent" with the bank's experience. "The margins on CBA's home loans ... have contracted, as reported at our interim results in February," Mr Batten said.
Westpac spokesman David Lording said its margins had been "contracting for many years".
Goldman Sachs JBWere chief economist Tim Toohey said the Reserve Bank would have been aware of the prospect of the retail banks not cutting rates when it decided to move interest rates down to 3 per cent.
The Bank of Queensland chief executive David Liddy said the political reaction was not justified as the Australian banks still faced higher costs for funding sourced from domestic and offshore financial markets.
"To hear the Government and the Opposition say that banks need a kick up the bum is irresponsible," Mr Liddy told The Australian. "I think that the federal Government is only interested in one thing and that's the stability of the big four, they are not interested in competition at all." Mr Liddy has campaigned for the Government to reduce the 150-basis-point charge the bank incurs for using the government guarantee to insure retail deposits and access overseas funding markets, whereas the top four banks pay 70 basis points.
"That needs to be fixed, there has never been that much difference between the pricing in the market," Mr Liddy said. "That is why we are not seeing all of the changes in the cash rate being passed on."
Scott Murdoch and Tim Boreham | April 13, 2009
Article from: The Australian
THE major banks are making $450 a year more from each average home mortgage today than before the global financial crisis as they exploit weaker competition from non-bank lenders.
The cash grab by big banks, revealed in an analysis conducted for The Australian, threatens to further increase tensions between the banks and the Rudd Government.
The banks have cried poor, declaring they cannot afford to pass on the full benefit of the Reserve Bank's latest 0.25 percentage point interest rate cut because they are suffering from increased costs.
The ANZ, Commonwealth and Westpac have cut mortgage rates by only 0.1 of a percentage point while the NAB has given mortgage holders nothing.
However, an analysis of bank funding costs by Fujitsu Consulting shows the banks have increased the profit margin on home loans over the past two years.
The major banks are making at least $450 a year more on the average mortgage now compared with two years ago, at the peak of the economic boom and when interest rates were higher.
The raised margin reflects reduced competition as the majors buy smaller competitors and non-bank lenders exit the market.
The banks are disputing the Fujitsu assessment. However, it increases the political pressure on the Government, which has been accused by the Opposition of being too close to the banks.
Calculations by Fujitsu Consulting show the profit margin on a $300,000 loan has increased from 0.8 per cent two years ago to 0.95 per cent. The increased profit margin has coincided with the banks' share of the home loan market surging past 90 per cent.
In the past year there were 125,000 new mortgages originated, which, based on an average loan and the increased profit margin compared with two years ago, means the banks have earned an extra $56.25 million from those mortgages alone.
Fujitsu's calculations were based on the net margin between a blended mix of funding sources for the major banks.
A recent report by Fujitsu and investment bank JPMorgan found that the cost to banks of raising money in Europe, one of the major markets for the institutions, has become significantly cheaper, by at least 0.5 per cent, in the past month.
"The banks have been more aggressive in reclaiming these higher funding costs to maintain profitability," analysts at JPMorgan said.
"Banks have already passed on considerable rate rises to both households and businesses."
The decision by Westpac, ANZ and the CBA to cut their standard variable rate by only 0.1 of a percentage point was expected to save the three banks $850million a year, they said.
"At the moment, on our calculations, the margins on the loans have increased and the reason for that was we had a lot of non-bank lenders in the sector," Fujitsu's Martin North said.
"When the non-banks disappeared, all the competition disappeared."
However, Fujitsu's findings were challenged by CBA and Westpac, the country's two biggest home lenders.
CBA spokesman Steve Batten said the $450 figure was "not consistent" with the bank's experience. "The margins on CBA's home loans ... have contracted, as reported at our interim results in February," Mr Batten said.
Westpac spokesman David Lording said its margins had been "contracting for many years".
Goldman Sachs JBWere chief economist Tim Toohey said the Reserve Bank would have been aware of the prospect of the retail banks not cutting rates when it decided to move interest rates down to 3 per cent.
The Bank of Queensland chief executive David Liddy said the political reaction was not justified as the Australian banks still faced higher costs for funding sourced from domestic and offshore financial markets.
"To hear the Government and the Opposition say that banks need a kick up the bum is irresponsible," Mr Liddy told The Australian. "I think that the federal Government is only interested in one thing and that's the stability of the big four, they are not interested in competition at all." Mr Liddy has campaigned for the Government to reduce the 150-basis-point charge the bank incurs for using the government guarantee to insure retail deposits and access overseas funding markets, whereas the top four banks pay 70 basis points.
"That needs to be fixed, there has never been that much difference between the pricing in the market," Mr Liddy said. "That is why we are not seeing all of the changes in the cash rate being passed on."