Big four milking extra profits from borrowers

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This was published 13 years ago

Big four milking extra profits from borrowers

By Stuart Washington

THE big four banks have used the cover of the global financial crisis to charge borrowers more than the increase in their own costs, resulting in big profits for the lenders and much higher interest bills for many customers.

A BusinessDay analysis of Reserve Bank figures shows how much extra individual borrowers are paying monthly as a contribution to bank profits after the financial crisis hit in mid-2007.

The analysis reveals a borrower with a three-year fixed-rate home loan of $300,000 contributes between $75 and $125 of their monthly mortgage to extra bank profit.

The extra profit contribution is because banks have increased the interest rates they charge customers more than their own costs have increased as a result of the financial crisis.

Big banks have captured the extra profits so successfully they have contributed to a bumper round of profit reports in the most recent reporting season.

In their most recent results ANZ, Commonwealth, National Australia Bank and Westpac reported profits before tax of $14 billion in the first half of the financial year, a record result beating pre-crisis profit levels. Increased interest rates helped bolster the big four's lending operations even as their retail banks were knocked by cuts in fees they charged.

A spokesman for consumer advocacy group Choice, Christopher Zinn, said: ''It's well documented that the large banks profited in various ways from the financial downturn, including taking market share from smaller competitors, and increasing their lending profit margins.''

BusinessDay's analysis was based on the Reserve Bank's most recent quarterly bulletin showing how Australia's big four banks had faced a 1.3 to 1.4 per cent increase in their own funding costs since the crisis.

The bulletin also shows how the increase in costs faced by banks was more than offset by interest rate rises for their customers.

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Since the crisis began, fixed-rate mortgage borrowers on three to five-year terms are paying 1.7 to 1.8 per cent above a benchmark rate, business borrowers are paying 2 per cent above and personal borrowers 3.4 per cent above.

A business borrower with a $1 million overdraft is paying $500 to $583 a month in repayments as its contribution to extra bank profit.

The analysis also shows how the bigger interest rate increases for business and personal borrowers has effectively subsidised smaller rate increases in variable rate home loans.

Contrary to public perception, the analysis shows a $300,000 variable rate home loan is subsidised by the banks to the tune of $50 to $75 a month.

The result occurs because the Reserve Bank's estimate of a 1.1 per cent increase in variable rate mortgage costs above a benchmark rate has lagged the increases in the banks' costs.

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Australian Bankers Association chief Steve Munchenberg contested whether interest rate increases beyond the banks' own cost-of-funding rises could be regarded as profit.

He said rate rises for business and personal loans should be regarded as charging for higher risk, because bankers' assessments of risk in those markets had changed. He also said banks' own cost of funding was continuing to rise, and disputed the Reserve's finding that fixed-rate mortgage borrowers had rises above the banks' funding costs.

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