11 Aug The Raw Prawn
And the winner is….
Last week we saw the RBA drop rates by 25 basis points. Our initial sugar rush of excitement was soon abated by economic ketosis with the major banks only sparingly passing on the benefits to the borrowers. Australia’s mortgage belt only received the following benefits;
NAB 10 points
Suncorp 10 points
WBC 10 points (for Interest Only)
ANZ 12 points
CBA 13 points
Chalk and Cheese in the Playground
At the time of writing I am yet to see the commercial reference rates been adjusted. But for entertainment’s sake, let’s digest this matrix against the outcry of “increased funding costs” yelled from the roof tops of Australia’s traditional banks. Drawing from scholastic kindergarten mathematics, scrawled in chalk on the pavement, Australia’s banks procure around 30% of their funding from wholesale (domestic & offshore) funds. According to APRA’s June 2016 statistics, there were $1,929,931,000,000 lent to borrowers (consumer and commercial) from the top 5 banks (listed above).
I have then taken the liberty of delineating each bank’s loan book by the amount of interest rate savings they have with-held. This figure equates to $2,651,000,000 per annum in total of additional revenue to the banks. Nice score.
Now let’s fancifully reverse engineer the equation. With all else remaining status quo, if it is the wholesale funding costs that is the issue, these costs would have had to go up by 333% to compensate for this remarkable interest tax on borrowers. I am pretty sure it is not from this source.
Regulatory changes? Maybe so, but Basel iii is transitional with a gradual roll out commencing from 2015 to 2019. The true brunt of these changes are yet to be felt.
Perhaps the costs are apportioned to structural inefficiencies within the banking system, and are just being absorbed by the pricing power of the banks? Dare you whisper these words down the corridors of some of the world’s most profitable banks.
Or is it just supercharging the profits of the banks to ensure the shareholders receive double digit returns year in year out? Bonus season is back in town.
The Cherry or the Prawn
Now here is the cherry, since Nov 2010 the RBA has reduced rates by 325 basis points, but the average mortgage rate has only dropped by 250 basis points. Do the math’s on that!
Who do you think got served the raw prawn? The RBA in their attempt to stimulate the economy and reduce the exchange rate? Australian borrowers seeking to reduce their interest costs? Australian savers on seeking retirement income on their term deposits or the shareholders of the Australian banks? Maybe more than one prawn got served in that dish.
I will leave these questions open for a healthy (and maybe heated) debate.
(for greater insight into why the RBA dropped rates, please refer to this link: RBA Rate Drop)