IT’S PAYBACK TIME: Big pressure on banks to pass on cuts to customers

BySteven Banks

 -by: By Sarah O’Carroll


May 02, 2012 1:13PM

THE Big Four banks are expected to come under scrutiny again today, with just a fraction of their combined billion dollar net profits needed to pass on yesterday’s official rate cuts in full.

With first half profits of the Big Four tipped to hit $12.5 billion this year, the cost to the banks to pass on the savings would be $590 million -or 4.72 per cent of this total – according to calculations by

The comparison site found over a six-month period it would roughly cost ANZ $120 million; CBA $176.4 million; NAB $127.2 million and Westpac $166.2 million to pass on yesterday’s 50 basis point cut in full.

The cuts to the official cash rate are aimed at boosting the economy, increasing consumer confidence and lowering borrowing rates. But unions, politicians and business agree banks need to pass on the savings in full if this is to work.

ANZ Banking Group today lifted its first half profit by 10 per cent to $2.92 billion.

All eyes are now on the bank to see if it passes on yesterday’s rate cut, but ANZ would not comment on rates before it makes its official announcement on May 11.

In today’s results the bank indicated that any rate cut would likely be less than 50 basis points, with ANZ saying its margins had declined in the six months to March 31.

ANZ chief Mike Smith said the bank was adapting to the changing financial environment, which would impact customers and staff.

“Our recent decisions on interest rates for customers in Australia and on employment within the group reflect the need to reshape our business,” he said.

“Clearly, though, we need to work harder to find new ways of responding to customer and community concerns about banking and to the changes that have been brought upon the banking sector by this environment.”

Video: How the Reserve Bank rates cut will affect you

Westpac is next up, with analysts predicting a net profit of $3.11 billion when it reports its half year tomorrow.

A spokesperson says their variable mortgage rate is “constantly under review” and the bank had already jumped the gun by announcing fixed rate reductions and a variable rate discount (extended to loans from $150,000) before yesterday’s RBA decision.

The move gives “some cover for Westpac to pass on less than the full cash rate reduction,” according to RateCity CEO Damian Smith.

Mr Smith said he expected some lenders would pass on the cash rate reduction in full but still remain above the average standard variable rate of 6.88 per cent.

“Quite often we see lenders announcing what look like big rate drops but they have a much higher rate to begin with and aren’t necessarily the best option for borrowers,” he said.

Commonwealth Bank, which reports on a different cycle, announced in February a net profit of $3.6 billion for the half year ended December 31, 2011.

Full rate cut pass-on unlikely

While federal Treasurer Wayne Swan said customers would be “very, very angry” if the banks did not pass on the full cut, Bell Potter banking analyst TS Lim said he doubted mortgage holders would see a 0.5 per cent fall in home loan rates.

Reductions in the range of 0.3 per cent to 0.35 per cent were likely, he said.

There was also scope for reductions in fixed interest rate mortgages.

“I think (banks) will drop the rates on deposits and pass on some (of the cut) to home loans,” Mr Lim said.

“Deposit rates in recent months have actually been pretty high.”

Mr Lim said ANZ was the best placed of the big four to lead with a reduction in interest rates because of its better margins relative to its rivals.

However, having just hiked rates by 0.06 per cent independently of the RBA in April, it was unlikely to backtrack.

“Of all the banks the one who needs to show some leadership would be Westpac,” Mr Lim said.

“They need to get their revenue momentum up and running.”

On Monday, NAB flagged its first half net profit would come in at $2.05 billion when it unveils its latest set of earnings results next week.

One analyst said NAB was unlikely to lift rates after a multi-billion dollar profit.

Regional lender Bank of Queensland, late yesterday, said that it would pass on only 35 basis points of the official 50 basis point cut announced by the Reserve Bank of Australia (RBA).

Bank of Queensland chief executive Stuart Grimshaw said the bank’s decision to hold back 15 basis points had been influenced by continued economic uncertainty.

“Increased competition in retail term deposits continues to upward pressure on the bank’s cost of funds,” Mr Grimshaw said.

Banks need to protect profits
Steven Münchenberg, Chief Executive of the Australian Bankers’ Association, said that although people don’t necessarily believe it, the banks do worry about the backlash of not passing on rate cuts.

However the banks still have grave concerns about the situation in Europe and many executives think it will get worse before it will get better, Mr Münchenberg said.

“We are under no illusion that to not pass on rate cuts in full is a very unpopular move and causes considerable anger in the community and among customers,” he  said.

“On the other hand, since the middle of last year the cost of funding has gone up relative to the cash rate. The banks absorbed those higher funding costs between July and February this year.”

Mr Münchenberg said that an independent study showed that had the banks passed on the Reserve Bank cuts during the GFC it would have resulted in Australian Banks making a loss in 2009.

“I understand that people look at the size of the profits and that they are incredibly large, but the reality is that we need those healthy profits to demonstrate to the rest of the world that the Australian banking system is healthy and stable and we need to do that because for every dollar we lend in Australia, we have to raise 20 cents of that overseas.”

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