Patience with the banks may be tested if they break ranks on rates. Illustration: Karl Hilzinger
Just how close is the public's anger with the banks to bursting?
We could find out as soon as tomorrow when the ANZ may become the first of the major banks to raise variable interest rates out of sync with the Reserve Bank in four years.
The Melbourne-based bank began its independent monthly announcement last month when the RBA was holding its regular January break from interest rate meetings.
The ANZ left lending rates unchanged then but senior executives at the bank have stressed their intention to distance the bank from the RBA's decisions and base rates more directly on their own costs of funds.
And so, while borrowers missed on an expected RBA rate cut on Tuesday, they now have to contend with the prospect of a rate rise by the ANZ - one that would most likely trigger similar moves by rival banks.
How did it come to this, since banks pocketed $24.3 billion in profit last financial year and National Australia Bank reported this week its first-quarter cash profit increased 7.7 per cent to a mean $1.4 billion?
Held hostage
Analysts say evidence is mounting that if banks don't lift rates independent of the central bank, they won't be able to make a profit on fresh loans at current mortgage rates.
“If that happens the banks will shrink their balance sheets and you'll get no credit growth and ultimately credit growth is the lifeblood of the economy,” said RBC Capital Market economist Su-Lin Ong. “So the banks to some degree are holding everyone hostage.”
Economists such as Leith van Onselen have argued that banks would in effect begin a lending strike if they're not able to make a profit on their loans. As a result, it makes little sense for politicians such as Treasurer Wayne Swan to hound banks over interest rates when they are in the business of making money.
Slowing growth
It's already clear, though, that consumers are recovering from their borrowing binge over much of the first decade of the 21 century - if not earlier.
Mortgage demand growth has slowed to just a third of what it was before the global financial crisis. Beyond the booming mining sector, industries from retailing to car making say they are doing it tough and are less keen to take on new debt until the outlook for the economy brightens.
Job cuts in the thousands are under way as banks seek to squeeze costs as the way to maintain profits.
Still, it's hard for many Australians to feel great sympathy for major banks struggling to expand.
Aside from the sheer size of the banks profits, many customers feel the banks take every opportunity to hike fees or take advantage of interest rate movements to fatten their profit margins.
While those perceptions about margins may be wrong - international money markets have seen funding costs increase in the wake of the European debt crisis - the banks have done themselves few favours.
Backing a winner
For instance, the Commonwealth Bank used the RBA's surprise rate rise on Melbourne Cup day 2010 to tack on 20 basis points to the 25 basis-point increase by the central bank. At one time or another, all the the big four banks have failed to pass on a full interest rate cut or have tacked on an extra increase - none have handed back anything extra.
The big banks' average return on equity, a common measure of profitability, actually improved in 2011, rising 15.55 per cent from 14.55 per cent the year before - a respectable level of profits in a post-credit boom environment.
Adding to the power of the banks is the sheer amount of mortgage debt households owe them, said University of Western Sydney professor Steve Keen.
“(Banks') power is relative to the amount of debt in existence,” he said.
Back in the 1960s, when private debt was equivalent to 25 per cent of the nation’s gross domestic product, the banks had very little power. “Now that it's over 150 per cent they wield immense power,” Mr Keen said.
CEO rewards
With fat profits to divvy up, the banks in turn lavishly rewarded their chiefs.
ANZ chief executive Mike Smith earned $10 million in the 2011 financial year, while now-retired Commonwealth Bank head Ralph Norris collected $8.6 million in the year to June.
Westpac boss Gail Kelly pocketed about $8.7 million, matching NAB chief Cameron Clyne's total pay last year.
Political options
The Greens, among other politicians - mostly from outside the two main parties - have pounced on public impatience with the bankers and bank earnings.
“I think the public is increasingly sick of the very loud noises that politicians make about banks when they're not backed up with action,” said Greens MP Adam Bandt. “There is now, in the current parliament a good opportunity to take some steps to tilt the balance back in favour of the public.”
Mr Bandt argues that banking is an “essential service” rather than a business. For this reason, he supports legislation that would force banks to offer low-cost, basic account services, along with mortgages that tracked the official RBA rates.
While Treasurer Swan has jawboned the banks not to break ranks with the RBA, he's also conscious that he has few direct levers at his disposal. He's also keen not to shake Australia's global economic reputation - with four top-rated commercial banks underpinning its relative health.
The other problem is that the big four banks are so dominant, with more than 80 per cent of the mortgage market between them.
So when the Bank of Queensland today says it will keep its standard variable home loan interest rates steady, in line with this week's decision by the Reserve Bank, it has too few customers to make a big difference.
(Managing director Stuart Grimshaw said BOQ understands many homeowners and small business owners are concerned about out-of-cycle interest rates and they want to take the opportunity to reassure customers there'll be no change to standard variable interest rates at this stage.)
And there's no sign of a major competitor emerging in the near term. BankWest, St George, RAMS and Wizard are among financial companies to bow out or be swallowed up by others since 2007.
Richard Denniss, the Australia Institute's director, says there is a fast way to deliver competition in the banking market: give Australia Post a banking role.
“A million people demanding better service from their government-owned postal bank would have far more impact on our parliament than a million outraged customers who couldn't believe when the banks increased their mortgage interest rates well ahead of the RBA on Melbourne Cup day 2010.”
czappone@fairfax.com.au, with AAP
This reporter is on Twitter: @chrizap
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