The major banks’ implied lending spread narrowed over 2022, when average funding costs increased by around 30 basis points more than average lending rates, the Reserve Bank reported in a review of bank’s funding costs and lending rates.
The RBA’s estimate of the lending spread - the difference between the rate a bank charges borrowers and its overall funding cost - differs from measures of profitability reported by banks, such as net interest margin.
It said this is because the lending spread does not include the effects of non-loan interest-earning assets, such as cash and other high quality liquid assets. These are included in NIM calculations. NIM also fully reflects hedging cash flows, while lending spread estimates only partially account for hedging.
The RBA said the overall increase in major banks’ non-equity funding costs was smaller than the increase in the cash rate over the year.
At the same time, the increase in outstanding lending rates was limited by the large share of fixed-rate housing credit taken out at historically low rates and ongoing price competition to attract and retain business.
During 2022 the RBA raised the cash rate target by 300 basis points to 3.1 per cent. Major banks’ funding costs increased by around 275 bps over the same period.
The RBA said: “The factors contributing to this gap included limited pass-through of increased interest rates in other markets to some of the rates paid on the banks’ deposit base (particularly household and at-call products) and lags in the effect of higher bank bill swap rates on wholesale funding costs.”
Much of banks’ wholesale debt and deposit funding is linked to bank bill swap rates, either directly or via hedging, and these rates are influenced by the cash rate and cash rate expectations.
The RBA said most of the impact of a change in BBSW rates flows through to wholesale funding costs in three to six months, with the timeframe varying according to the maturity profiles of banks short-term debt, wholesale deposits and interest rate hedging instruments.
Average rates on new term deposits increased by more than the cash rate, in line with the larger movements in BBSW and longer-term swap rates. But at-call deposits accounted for around 80 per cent of major banks’ deposit base in 2022.
By depositor type, banks have increased rates on wholesale deposits by more than on household deposits.
The RBA said this difference reflects wholesale depositors having a wider range of market-based alternatives in which to place cash.
On lending rates, the RBA said the average outstanding housing loan rate increased by around 190 bps between April and November last year and the average business rate increased by just over 260 bps.
The average new lending rates for housing and business purposes rose by a little more than the average rates charged to existing borrowers but by less than the cash rate increase.
“Although lenders passed on cash rate increases in full to variable reference rates, very few borrowers pay rates as high as these,” the RBA said.
Based on its liaison with lenders, the RBA estimated that around 30 per cent of variable rate borrowers have renegotiated a lower rate on their housing loan with their existing lender since May. Many others have refinanced with a new lender, with major banks extending cashback offers to customers of around two to four thousand dollars.
Another factor is that the major banks had an unusually large volume of fixed-rate mortgages, which did not re-price.