INTEREST rates may be cut to as low as 2 per cent, according to National Australia Bank, but that does not mean its customers with loans of any shape and size are likely to benefit from future reductions.
Such are the higher costs of raising money in wholesale funding markets from which the bank derives 43 per cent of its financing that NAB's chief executive, Cameron Clyne, yesterday gave his strongest hint yet that mortgage and business interest rates may have reached the bottom of the current cycle of cuts. According to Clyne, the big problem for NAB is that its profit margins continue to take a hit since the pricing of the loans it offers do not truly reflect the cost of its own borrowing.
Which is why NAB chose to withhold the entire amount of the most recent quarter of a percentage point cut when the Reserve Bank trimmed the official cash rate to 3 per cent. To that end, rates in the cheaper short-term money markets are not the major problem for the big four. It is the direction that rates are going in regards to more expensive longer-term sources - between a year and five years - which is Clyne's biggest worry, and that is up.
These are markets which make up the biggest slice of NAB's outside funding and which have suffered the greatest turmoil through the global financial crisis that has now morphed into a savage worldwide recession.
It is understandable therefore that Clyne should call for wider public debate (and acceptance thereof by implication) of what are "enormous structural challenges" surrounding the sector's funding problems. But despite suffering a 10 per cent cut to net cash earnings (primarily due to soaring bad debts) and taking the axe to the half-year dividend, Clyne's timing in making the case for greater understanding was somewhat unfortunate given the performance of NAB's Australian division that contributes more than two-thirds of the group's profits.
While NAB may not be making a lot of money from certain parts of its loan book, the division's net interest margin in fact rose four basis points over the half year to March 30, a slender rise but an increase in profitability nonetheless.
The picture is even starker - and significantly less helpful for Clyne's case when the year-on-year comparison kicks in. Twelve months ago the division's net margin after costs was 2.36 per cent. This time around it was 2.53 per cent, an improvement of 17 basis points.
NAB was at pains yesterday to emphasise it had passed onto customers the second highest amount - 3.87 per cent - of the 4.25 per cent cuts in interest rates made since last September.
It was a fair point but one undone by the fact that much of its latest margin gain appears to have come from money that NAB made in lending to its customers.
That is a factor that will hardly garner much support from the very same people the NAB chief executive hopes to influence the next time he hangs onto another cut in interest rates.
