The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Monday, January 30, 2012

How much have bank funding costs actually increased by?

UBS tells us via David Bassanese, who has produced another excellent column today over at the AFR:

We’re still left with the question: by how much have overall bank funding costs increased? If the RBA cuts rates, how much should we expect the bank to pass on to mortgage rates? UBS says: “Sustained higher wholesale funding and the shifting deposit mix is worth – at worst – around 10 basis points per year to banks’ net interest margins.” That means if the RBA cuts rates by 25 basis points, banks may pass on only a 15-basis-point rate cut. “While complex, our [funding cost] analysis suggests any lesser pass through would be unjustified,” says UBS. Of course, if the home loan market is as truly competitive as some argue, maybe there’s a bank that will buck the trend – sacrificing some profit margin for a higher overall market share. After all, RBA analysis clearly shows that bank profitability seems at least as good, if not better, than before the financial crisis began in mid-2007. In its latest Financial Stability Review report, for example, the RBA notes the average return on equity across major banks in the latest half-year reporting period was a healthy 17 per cent “which is broadly in line with the pre-crisis level”. What’s more, in its December statement, the bank notes that the major banks pulled off a “slight increase” in their domestic net interest margins in the latest half-year and, since 2004, this margin has fluctuated in a narrow range of between 2.25 and 2.5 percentage points. This sustained profitability is not bad considering the slowdown in local credit growth and increase in global credit premiums – and probably reflects the more dominant market position banks have gained in the post-financial crisis world.