The Big Four banks are reporting thumping profits and recording skyrocketing share prices as the media again turns to the seasonal Bashing of the Banks.
And after a year where Australian lenders consistently pocketed a share of Reserve Bank rate cuts, they appear pretty fair game.
The RBA has dropped the cash rate six times since November 2011, to the tune of 1.75 per cent.
However despite this aggressive cutting cycle, standard variable home loan rates have fallen by an average of just1.33 per cent.
On a $300k loan, that difference comes to $83 a month in extra repayments at current rates. If applied over a full year that’s near on $1000 extra out of pocket mortgage repayments.
But there are a few problems that mean we can’t just peg this apparent extortion on the Big Four. Because while it’s true mortgage holders are paying more than if the banks had passed on rate cuts in full, they are borrowers too and facing higher costs themselves.
The reason that bank funding costs have increased over the last year is simply down to a torrid period of economic calamity and enormous uncertainty.
As Europe rattled the can institutional lenders pulled their money out of debt markets to shore up their own finances, and with less money available for the banks to borrow, interest rates rose.
It’s like a shortage of tomatoes increasing the price a supermarket pays to growers, which in turn increases the price you pay for those tomatoes at the supermarket.
Of course it’s a little more complicated than that as there are a range of funding options used by the banks, but you get the gist.
Unfortunately, the Reserve Bank has signalled that the price of tomatoes still hasn’t come down all that much.
In its quarterly Statement on Monetary Policy released last week, the RBA said that bank funding costs remain relatively unchanged from last year, hence the reluctance of banks to cut rates out of cycle.
“The relative cost of banks' outstanding long-term wholesale debt remained stable over the period, with the large reduction in spreads for new bond issuance having only minimal effect on banks' outstanding wholesale costs at this stage,” the RBA’s quarterly Statement read.
“It will take some time for the reduction in spreads to flow through to overall bank funding costs owing to the relatively subdued growth in credit and the slow run-off of wholesale debt issued previously.”
To put that in plain terms, the banks are still paying off their funding at the rates they borrowed at last year; in much the same way your mortgage rate has probably stayed pretty steady too.
Although this has changed over the past week with most banks moving their fixed rates lower, this appears more a strategic move with the actual cost of funding apparently steady.
That said, Commonwealth Bank chief executive Ian Narev has raised the possibility of cutting out of cycle over the next year as their old borrowings rollover to lower rates. But don’t bank on it.
What you can and should do is ask for a better deal from your bank. As I’ve said before, you’re a mug if paying the advertised rate.
So call your banker and get a better deal today, and if they’re not forthcoming then look elsewhere. The Bashing of the Banks won’t get you anywhere. Being proactive about your borrowings will.
Also why not climb on board the bank gravy train. The banks say they have an obligation to shareholders… so become one. Most of our superannuation funds would have the Big 4 banks in their portfolio, so we’re benefitting already, but why not look at investing in bank shares.
Over any 10 year period shares in our Big 4 banks have outperformed any product they’ve offered their customers. Since July, for instance, Commonwealth Bank shares have risen 25 per cent.