Higher funding costs fully covered
Increases in major bank lending rates have more than fully offset the significant increase in their funding costs since mid 2007, according to the Reserve Bank of Australia.
A paper on bank funding costs and lending rates, prepared by four members of the RBA's domestic markets department and released yesterday, reports that bank funding costs are "significantly higher relative to the cash rate" than they were in mid 2007 due to the increase in the cost of deposits and a shift in the banks' funding mix to more stable (and more expensive) types of funding - deposits and long-term wholesale debt.
The RBA estimates that the average cost of the major banks' funding is about 130 to 140 basis points higher relative to the cash rate than it was in mid 2007.
The report says the major banks' average interest rate on outstanding household and business loans is around 160 to 165 points higher, relative to the cash rate, than it was in mid 2007.
It says: "Most of the increase in lending rates over the cash rate has been due to higher funding costs. For the major banks, however, there has also been some widening in their lending margins."
The RBA says net interest margins are 20 to 25 basis points higher than pre-crisis levels.
This analysis is at odds with statements made by bank chiefs at recent presentations. When CBA chief executive Ralph Norris presented the bank's December half results he said the bank faced continuing funding cost pressure and that "the pressure is not going to diminish any time soon."
And when Westpac chief executive Gail Kelly delivered a December quarter update she said the bank still had additional funding costs that it wanted to pass through.
Reviewing the change in funding mix, the RBA report says the share of funding that comes from deposits for all banks in Australia has risen by three percentage points since mid 2007 to 42 per cent. Term deposits have accounted for most of the growth in deposit funding.
The average cost of the major banks' new deposits is currently slightly higher than the cash rate, compared with about 150 basis points below the cash rate before the onset of the financial crisis.
For the regional banks, the increase has been higher because of their heavier reliance on term deposits - 55 per cent of deposits compared to 40 per cent for the majors.
The average rate on term deposit "specials" is about 140 basis points above the money market rates over equivalent terms. In the year before the crisis it was 60 points below market rates.
The average rate on the major banks' at-call deposits is around 60 basis points below the cash rate, compared to 100 points below in mid 2007.
The share of funding from domestic and foreign long-term wholesale debt increased by six percentage points over the same period to 24 per cent.
The cost of a three-year bond was 10 to 20 basis points over the swap rate in mid 2007. The spread went to a peak of 170 points in early 2009 and is currently in the range of 80 to120 basis points.
The cost of the major banks' outstanding long-term debt has risen by 100 points relative to money market rates. The RBA estimates that if bond spreads remain at current levels, as maturing bonds are rolled over the average spread will increase by another 30 basis points this year.
For regional banks the cost of issuing a three-year bond is 200 to 250 points over the swap rate.
Taking all the funding components together (adding short-term wholesale debt, securitisation and hybrid issuance to the mix), the RBA estimates that the average cost of the major banks' funding is about 130 to 140 basis points higher relative to the cash rate than it was in mid 2007.
The banks have raised their lending rates relative to the cash rate for all their lending products. Rates on variable rate housing loans have increased by 110 basis points relative to the cash rate since mid 2007, three- and five-year fixed rate home loans by 170 to 180 points relative to swap rates, personal loans by 340 basis points relative to cash and small business variable indicator rates by 200 basis points.
The average spread on new term loans to large businesses increased from a spread of 50 to 100 basis points in mid 2007 to 250 to 300 basis points in mid 2009.
Overall the major banks' average interest rate on outstanding household and business loans is around 160 to 165 points higher, relative to the cash rate, than it was in mid 2007.