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Time for banks to take one for the team

Getting ready to again announce record billion-dollar profits ... the big banks.

Getting ready to again announce record billion-dollar profits ... the big banks. Photo: Louie Douvis

The contrast could not be more stark; as the Reserve Bank prepares to cut interest rates next week to kickstart a rapidly cooling economy, the big banks will be getting ready to again announce record billion-dollar profits.

Talk is already turning to how much of the RBA rate cut the big banks will pass on to mortgage holders.

Make no mistake: profits are a good thing. And Australia does need a strong and healthy banking system. But there's a mounting argument that banks too should play their part in helping restart the economy. And they should start by passing on next Tuesday's rate cut in full.

In a world of post-financial crisis belt tightening, the banks appear to be the only ones jollying along as if nothing has changed.

What has changed, however, is their market power, which is now stronger than ever.

While it is clear the RBA is having a hard time juggling the competing inflationary forces of a mining boom west of the Nullarbor with the recessionary funk on the east coast, the banks are behaving as if they are determined to maintain their profit trajectory.

Other sectors such as retail and service industries have argued for months that they need the stimulus of a rate cut to get consumers spending.

Even miners, in the middle of a once-in-a-lifetime boom, are pulling their heads in. China is cooling. Commodity prices are falling. A fall in coal prices has seen expectations of investment in mining ease.

Belts are being tightened everywhere. Households are paying off debt. Companies are trying to cut costs wherever they can.

From the behaviour of the banks, however, it appears they believe banking profits are sacred. Any criticism is met with the response about ''the need for a healthy banking system'' and their need to pass on their higher cost of funding.

Banks are their own worst enemies when it comes to public relations: passing on rate rises to borrowers in full within days of them taking effect, and often not raising interest rates on deposit accounts by the full amount; delaying cuts to interest rates by weeks or months and then not passing it all on to boost their margins.

The heart of the banks' problem at the moment is that they are writing precious little new business because no one is borrowing.

Banks lend money to make money. And as no one is borrowing, the banks are squeezing their existing customer base to increase profits and appease their masters, the shareholders.

The banks are behaving as if they are not willing to accept any crimping on profits. Such short-term thinking reeks of executives using their market power to cover over the cracks with boards and investors.

But their market position is so dominant they have an impact on the broader economy. Arguably, banks with billion-dollar profits can still afford to do their bit to help lift the broader economy.

Analysts have pointed out that the coming reporting season for banks will be uninspiring for a sector that has been raking it in for years - a low point before things pick up again. While cash earnings are unlikely to impress investors, the headline figure will be billions in record profits.

Banks are trying to protect their margins and, crucially, they have the market power to push through increases in interest rates.

But as a result of this week's weak inflation result, markets are pricing in as many as four interest rate cuts before the end of the year. Those economists who until this week thought there might be only one rate cut, now fear the slowing economy will need at least two rate cuts to get growth moving.

Some analysts argue this will allow banks greater leverage to keep some of the cuts for themselves.

Banks have been arguing of late that their cost of funding has been rising. This is true. But not all the money being raised offshore at high rates is being used for financing mortgages. Some is for business financing. Banks are increasingly using Australian deposits to fund their operations.

While their average costs have been rising, mortgage holders feel they are left holding the can. The belt tightens further.

It is in the banks' interests to lend money and to create a supportive environment to borrow and invest.

They could do worse than loosen the strings and help the broader economy find its feet.

Michael Evans is a senior writer on BusinessDay.

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84 comments

  • If you want banks to change their tune then stop using them. Everyone responds swiftly to the bottom line so when people move to other lenders the banks will fight harder to win that business. Another thing is to realise your borrowing capacity and work within that.

    Commenter
    Bender
    Date and time
    April 27, 2012, 8:52AM
    • If we as Australians want an uncompetitive and oligopolistic banking sector then this is what we should expect. Open our banking sector to competition and watch mortgage rates drop like a stone. There are plenty of banks in the world with excess capital who would be very interested in lending here

      Commenter
      rkw
      Date and time
      April 27, 2012, 10:27AM
    • RKW, Please explain how these overseas banks will lend Australian dollars to borrowers at lower rates, or are you proposing a risk free foreign currency loan?

      Commenter
      Michael
      Location
      Sydney
      Date and time
      April 27, 2012, 11:44AM
    • rkw 10.27am. That's what happened in th '80's. Lots of foreign banks opened offices (most in Sydney), but found the competition hard going. Then, when Wall st imploded in 2008, banks around the World either went bust or got taken over, or worse, bailed out by their governments(courtesy of the taxpayers). I don't know that the last part of your comment about "Banks with excess capital" is entirely accurate.

      Commenter
      Brian Harry
      Location
      Tweed Heads NSW
      Date and time
      April 27, 2012, 11:44AM
    • Proud credit unionist for nearly 4 years. Treated with respect, often get to speak with the manager in branch when doing transactions etc, have a say in who is our board, oh and the profits go into making better products and safeguarding our savings, not to shareholders.

      Commenter
      Liam
      Location
      Nathan
      Date and time
      April 27, 2012, 1:10PM
  • I am planning to enter the property market soon and I will need a loan. Non big four banks (credit unions etc) might be getting my business if I don't see an attitude adjustment from the big four. They can work with me for my business, but I can't see the insipidly unimaginative banking execs and their over paid boards doing anything like that.

    Commenter
    Rhino
    Date and time
    April 27, 2012, 9:13AM
    • @Rhino, why on earth would you consider the Big 4 banks?!

      What have they got that other lenders (online banks, e.g. ING Direct; Credit Unions e.g. Mutual or Teachers; Building Societies e.g. Greater) do not have? They've certainly got higher interest rates and fees, that's for sure. Customer service? Pfft!

      Consider a smaller lender and dont let the old "security" argument sway you towards big banks. The Govt's funding guarantee applies across all financial institutions for several more years yet, so even if a smaller lender does go under (and when was the last time you heard of that happening?) the Gov't guarantees your money back. So I ask again, what possible good reason could there be for choosing the Big 4?!

      Commenter
      Jesterhat
      Location
      Newcastle
      Date and time
      April 27, 2012, 9:51AM
    • Yes that might be a good idea. then you can pay $2 atm fee every time you use ur credit union atm card!

      Aussie banks arent entirely funded by deposits and savings accounts in Australia so this whole "pass on the cut" argument is flawed. If they are only 70% deposit funded, they need only pass on 70% of the rate cut.

      Commenter
      Ceros
      Location
      Zoo
      Date and time
      April 27, 2012, 9:52AM
    • I use my HSBC cards on Westpac & St george ATMs for free.

      Commenter
      Snake
      Location
      SYdney
      Date and time
      April 27, 2012, 10:25AM
    • @Ceros
      Plenty of redi tellers around that don't cost me a cent for my credit union account ATM withdrawals. And the NAB is nice enough to have a reciprical arrangement with the rediteller network where I don't pay a fee for their ATMs either.

      It's only the ATMs at the pub or convenience store, where I pay the fee. But they sting the big four users too...

      Commenter
      Pauly
      Location
      The Gong
      Date and time
      April 27, 2012, 10:50AM

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