Friday, November 19, 2010

Don't wish too hard. Ralph Norris on bank costs.

Ralph Norris should be careful what he wishes for. In the heat of argument about bank margins this week the Commonwealth Bank chief said he would "tend to take the view of the Reserve Bank over the Australia Institute."

But the Bank's view is if anything tougher than the Institute's.

The Institute Tuesday pointed to figures released by the Prudential Regulation Authority APRA showing the average interest rate paid by the big Australian banks climbed more slowly than the RBA cash rate between June quarter 2009 and June 2010. It is not a surprising finding. The RBA cash rate climbed sharply between those quarters and the big banks get much of their funds from sources not linked to it.

The Reserve Bank's view is something else again. It is actually three views relating to three different time periods, none of them the period to which the APRA figures relate. Published in November just after the Bank's Melbourne Cup Day board meeting and referring to "recent months" the Bank's quarterly statement said "in aggregate, the major banks' funding costs are likely to have been little changed over recent months, though trends differ for individual banks depending on their mix of funding."

"Little changed" is far from a ringing endorsement of Norris's claim that costs are rising, and a good deal less of an endorsement than the APRA figures for the earlier period, which at least showed costs climbing...

The Bank rubbed salt into the wounds in the November Statement also publishing a longer-term analysis of the big banks' net interest margin, which is a measure of the excess they charge for what they lend over and above what they pay to get it. It dived from the late 1990s to around 2004 as the big banks faced increasing competition. Since then it stayed fairly steady. In the Reserve Bank's words it has "fluctuated in a relatively narrow range since 2004". Put more simply, bank margins are as high now as they were in 2004 (and actually higher than for some of the points in between).

The Reserve rammed home the point in its October board minutes saying the banks' spread "remained well above its pre-crisis level," meaning margins remained higher than before the crisis hit.

The November Melbourne Cup Day minutes give Norris some hope. They refer not to the past financial year or to recent months but to the present.

The board says the shares of relatively high cost funds are climbing, while the share of short-term debt is falling. This is "slowly adding to the banks' cost of funds".

But this says little more than the APRA figures cited by the Australia Institute of which Mr Norris disapproves. APRA said interest costs were climbing between the 2009 and 2010 June quarters. The Reserve Bank says they are climbing again now. Yesterday at a conference in Perth the Bank's Deputy Governor Rick Battellino said they were climbing "more than the cash rate".

But there's more to it than interest costs. During the GFC the big banks cut commissions to mortgage brokers (by about one-third) and cut marketing spending as their competitors fell away. Their profit margin matters more than their interest margin, and it soared. Between June 2009 and June 2010 it climbed from 23.1 per cent to 33.1 per cent, roughly twice as much as the smaller banks. Norris and his colleagues are doing alright.

Published in today's SMH

Related Posts

. Banks: Don't believe those APRA figures, believe these ones.

. Banks costs. They're increasing. But by less than the cash rate.

. Bank margins aren't shrinking!