By Eric Johnston and Gareth Hutchens
BANKS are expected to start facing questions from customers to unwind some of their recent out-of-cycle mortgage pricing rises amid signs that the pressures driving up funding costs are easing.
Borrowers are likely to be emboldened by a senior Reserve Bank official bluntly declaring the major banks had pushed through their recent round of mortgage rate increases in order to maintain profits.
The price of money is falling for the banks.Credit: Phil Carrick
The comments yesterday by Reserve Bank assistant governor Guy Debelle follow several leading analysts questioning the claim of bank executives that the sector was struggling under rising funding costs and mortgages were unprofitable before the recent rate rises.
Each of the big four banks drew the ire of customers and federal Treasurer Wayne Swan last month after raising mortgage lending rates by as much as 15 basis points after the RBA's decision to keep the cash rate on hold.
The banks insisted the move was necessary given the run-up in funding costs because of Europe's debt problems.
But Citigroup analyst Craig Williams said on one measure of profitability - return on equity - mortgage returns for banks were ''substantially higher than pre-GFC levels''.
Since last month's mortgage rise, global money markets have started to reopen on easing tensions in the eurozone, with pricing for wholesale money falling from recent peaks.
The reopening of wholesale funding markets also mean banks are less willing to chase deposits by offering depositors high interest rates, helping to improve profitability, Deutsche Bank analyst James Freeman said.
Banks and their multibillion-dollar profits face a series of headwinds, ranging from new regulations to a slowdown in demand for loans. This is forcing lenders to profit more from existing businesses.
Dr Debelle yesterday acknowledged that by increasing mortgage rates, banks were responding to higher funding costs.
''Financial institutions have increased their lending rates in the face of the increase in costs to maintain their net interest margins,''he said in a speech in Sydney. ''In turn, this has been with the aim of maintaining profitability.''
But Dr Debelle stressed he was not seeking to answer a question on whether the movements in lending rates were ''appropriate''.
The Australian Bankers' Association insisted the cost of bank funding remained elevated relative to the cash rate, even as wholesale funding markets had started to function normally.
Banks had passed on only about half of the increase of funding costs to borrowers, said ABA chief executive Steve Munchenberg .
''Banks are continuing to absorb some of the higher fund costs to the benefit of their customers who have borrowed money,'' he said yesterday.
Still, Dr Debelle knocked down suggestions from bank executives there was no direct link between the Reserve Bank's cash rates and bank mortgage rates.
The level of the cash rate set by the Reserve Bank was a ''primary determinant'' of the level of funding costs for banks, he said. Although he noted there were other drivers, including competitive pressures for deposits and a premium for risks.