Cost of funds argument looks shaky

Any rationale banks may be working on to steer through increases in margins on politically sensitive home loans may be set back by the view of the Reserve Bank of Australia that "interest receipts … have been sufficient over the last two years to fully recoup higher funding costs." The RBA made the observation in its Financial Stability Review, published yesterday.

Westpac was one bank this week to drop another hint that it wanted to lift margins on home loans, and there is plenty of conjecture over whether one big bank might do so, and when. Westpac last took the lead on home loan pricing in late 2009.

The RBA emphasised its point on trends in bank income and bank funding costs in the FSR by noting that while the net interest margin of banks on a consolidated basis was 20 basis points higher than the trough in 2008, the NIUM for their Australian operations was 35 basis points higher.

The RBA noted that "banks have been less successful in recovering increases in their funding costs in overseas markets, which have been more adversely affected by the financial crisis than Australia."

Or in other words they have been more successful in Australia, even if the impact of higher margins fell mostly on business borrowers and consumer loans less sensitive than home loans.