Banks Quietly Lift Cost Of Fast Money

The Age

Thursday September 4, 2008

Eric Johnston

WHILE banks appear to be giving with one hand they are poised to take with the other.

Rates on credit cards, business loans and personal loans have been increasing at a faster rate than housing loans to offset more subdued movements on politically sensitive mortgages. Meanwhile, interest paid on the day-to-day transaction deposit accounts that hold about 15% of our savings, have barely moved.

To gauge just how much banks have been feeling the pinch on funding costs, it is worth scrutinising their net interest margin - which is a measure of their profitability. And banks have been getting better at managing it.

Of the banks with a June year-end, Commonwealth Bank's net interest margins slipped by 6basis points to 2.02% - less than the rate of falls experienced by the sector over recent years, even as the cost of wholesale funding peaked.

Elsewhere, deposit-rich Bendigo Bank's net interest margin fell by just 5 basis points, while Suncorp-Metway's was hit harder, with its margins crunched 18 basis points over the past year, although it recovered slightly in the second half.

For the sector as a whole, the average net interest margin fell by 16 basis points for the year to the end of March. A year earlier average margins fell by 8 basis points even as funding costs hit cyclical lows, KPMG figures show.

Small to mid-sized business customers have been among those hardest hit by banks, with many customers paying an interest rate of more than 10% on their loans, according to a recent report by JPMorgan and Fujitsu Consulting.

CBA chief executive Ralph Norris would not rule out further increases in interest rates given around 40% of funding comes from overseas. However, he did acknowledge the interest rate cycle could be turning.

"If there is a further major dislocation in international markets that has a flow-on effect on the cost of money, then I can't guarantee anything," he said.

ejohnston@theage.com.au

© 2008 The Age

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