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.
