As the banks report multi billion dollar profits, here’s a thought for struggling mortgage holders. Australian banks can pass on any Reserve Bank interest rate cuts for one very good reason: they can afford it.
Our big four banks are among the most creditworthy in the world, they have raised tens of billions of dollars from domestic depositors, who provide the banks’ cheapest and most stable funding, and the banks have experienced a sharp drop in international and domestic funding costs in recent weeks as interest rates ease.
Our banks are part of a group of just 14 around the world with international credit ratings of Double A or better. The quartet (Westpac, Commonwealth, NAB and ANZ) sit in a second tier group of 11 banks with Double A ratings. There are only three ahead of them, and of that, only one with a Triple A rating: that’s Rabobank of Holland.
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None of the banks’ foreign competitors in Australia have enough clout to challenge them. Further, Reserve Bank assistant Governor Phil Lowe pointed out in a speech yesterday that:
While at times, investors do not seem to have shown very much discrimination amongst banks around the world in terms of market prices, the ability of Australian banks to continue to raise significant volumes of funds is a positive reflection of their underlying strength.
You never hear that from our banks and their mouthpieces as they continually cry poor and moan about higher funding costs.
With such strong international credit ratings, our banks have been borrowing internationally at rates lower than such giants as UBS, Citigroup, and Deutsche Bank and much of their offshore financing was done earlier in the year when times were much tougher in credit markets. With their high ratings and Australia’s Triple A sovereign rating, the banks were having money thrown at them.
Mr Lowe yesterday pointed out that domestic bank bill rates had fallen half a per cent in the past couple of weeks, but there was now a margin of just 0.35% over what the banks were paying in margin a year ago. That compares to the average 0.55% the banks have loaded on home mortgages on top of the RBA’s 1% lift in the cash rate to 7.25%.
The key 90 day bank bill rate, which is the most important funding indicator for them has fallen from 7.78% on July 3 to 7.32% yesterday.
That means that 0.55% extra for the banks (on top of the RBA’s 1% lift in official rates) is now in turn being “crunched” by the easing conditions in the Australian market as fears subside and by the declining demand for credit because of the slowdown in home, personal and business lending.
But there’s another source of funding they never talk about as they defend what is now the indefensible: their domestic retail deposits.
In the obtuse comments by Commonwealth Bank head, Ralph Norris, and the support that has come from some commentators, there’s been no mention of the surge in deposits from retail customers experienced in the past year.
Mr Lowe said in his speech yesterday that:
This increase in competition in deposit markets has coincided with a renewed appetite by Australians for bank deposits. As a result, bank deposits are growing very quickly, increasing by 18 per cent over the past year, the fastest growth for many years. Term deposits by the household sector have grown even faster, up 40 per cent over the past year. Not surprisingly, many banks are now paying more attention to how best to attract and retain depositors.
Term deposits are up 40% in the past year. Our banks are rolling in the stuff and all have some or a good portion of their 2009 funding fixed up (and we are paying for that, ahead of it being used!).
Now there’s something else to consider: when the RBA cuts rates next month on September 2 by 0.25% or 0.50%, what will the banks do to deposit rates (around 8% and more for some terms)? Will they cut deposit rates, and delay any mortgage and credit card and personal loan cuts, as they do? Will they try to cut deposit rates first, then promise to look at lending rates?