Banks, I know you will be sad to hear, are apparently doing it tough. So tough that they are starting to cut term deposit rates because they think the Reserve Bank will cut the cash rate soon and they want to get in first so they can increase their profits.
Kicking the banks is pretty much a national pastime of Australians and, to be honest, fair enough. There’s a reason there was a royal commission into the misconduct in the banking, superannuation and financial services industry, and it wasn’t because a whole lot of lawyers had nothing better to do with their time.
Banks and other financial institutions were playing their customers for mugs.
You only need to look at the amount of fees earned by the big four banks (Commonwealth, ANZ, NAB and Westpac) to see why the royal commission was a good idea.
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But now it seems is time to get out the violins and play a sad tune for the country’s biggest lenders.
For you see they were hoping to make more profits than they have from higher interest rates. But alas, they say it was not to be.
The Australian Financial Review reported yesterday that “while [profit] margins usually expand when interest rates rise, the major banks competed away the benefits in an intense battle for borrowers refinancing fixed-rate mortgages”.
This, I should not need to remind anyone, is a good thing. This is what competition looks like.
Oh dear, banks are having to compete for our business by offering better rates! The horror!
This is essentially just a price war. The interest rate on loans is the price of the loan, and banks having to compete on prices is the very essence of what we should be seeing in a free market.
A loan is a loan is a loan. All those other things they offer, whether it be a bonus saver account or some special deal on your credit card, are just things done to stop you caring as much about the interest rate, much like supermarkets hand out nicknack giveaways.
All we are seeing is that we have become much better at realising that we can ask for a better deal.
And while banks will tell you their profit margins are suffering, let us not start to think we need to organise a telethon to help them out.
Each quarter the Australian Prudential Regulation Authority (Apra) releases data on profit margins and, let me tell you, they’re doing OK.
Actually, better than OK:
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Apra also tells us how much they are making from interest repayments compared with how much they are paying.
In April 2022, the month before the RBA began raising rates, the four major banks received $20.2bn in interest and paid out $4.6bn for a total of $15.6bn in net interest earnings. In the most recent quarter of June this year, the banks received $57bn and paid out $38.9bn for a net interest earnings total of $18.1bn.
And you don’t need to be a forensic accountant to be able to work out when the RBA began raising interest rates:
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While the rates offered for term deposits have risen since May 2022, on average they have risen by less than has the rate for owner-occupier housing loans:
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And while certainly there has been much hand-wringing that banks haven’t been able to raise the home loan rates by as much as the cash rate went up, the gap between the interest rates charged for average new discount owner-occupier home loans and the average rate for term deposits is as large as it has been since before the GFC in 2008:
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And that gap is about to get larger because, while the rest of us worry about the Reserve Bank changing rates and how that might affect our mortgages and deposits, the big banks have decided that waiting is for suckers.
The Commonwealth Bank, NAB and ANZ have all cut rates for term deposits because they anticipate the RBA cutting rates soon, so they might as well get in first. ANZ has cut its term deposit rate by up to 80 basis points.
Right now the market is predicting the RBA will cut rates repeatedly over the next 18 months, but it expects the cash rate to fall by 80 basis points only by around September next year.
So, it is fair to say the ANZ is rather jumping the gun:
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Have banks been able to make as much money as they would have liked over the past two years as interest rates rose? No, but they are not struggling, they are not weak.
And, if you doubt it, just look at their share prices, which have zoomed ahead of the ASX200 index since the Reserve Bank began raising rates – and especially so over the past nine months in which rates have been steady and supposedly banks are struggling:
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So don’t buy into the sales pitch – banks are doing well and all the talk about their need to cut rates is guff to cover the fact that, despite profits holding up, they are annoyed that Australians are becoming more savvy at shopping around for better rates and better deals for their home loans.