Banks to grab margin, but funding mix has changed.

Today, the Reserve Bank of Australia (RBA) announced no change to policy interest rates, which sit at an all-time low of 1.5%.

Despite this, major Aussie banks have already started to increase their lending rates, as we witnessed recently.

The extent of the increases is yet to be seen, however given the significant change in the funding mix of Australia’s major banks, the argument coming from the banking sector is nowhere near as strong as it was prior to the GFC.

Here’s why.

  • 10 years ago, the funding composition of Australian Banks was highly dependent on offshore debt with ~55% of funding sourced via offshore debt and securitisation.

  • This meant offshore costs of capital would largely flow through to the cost of funding for Aussie banks.

  • Today, the biggest funders of our banks are domestic depositors, to the tune of ~60%, with this representing a 50% increase in their influence over the past 10 years.

    This change in funding mix is demonstrated well by the RBA’s own data.

Source: RBA Chart Pack, September 2018.

Source: RBA Chart Pack, September 2018.

This means the offshore cost of capital (influenced by US interest rate hikes) will have less of an effect on bank margins, despite their bellyaching.

The Royal Commission has directed banks to stop charging fees to dead people. But if that sort of caper can fly under the radar for all of this time, you can imagine how opaque the banks will be when it comes to their cost of funding.

Still, the RBA should consider some form of regulation (and significant bank penalties) for unfair funding cost pass-through to customers.

And the banks should think about attracting more depositors with higher savings rates. With billions in profits, I am sure there is some room to move.

Next time you look for acquisition financing, or a refi of your current facilities, perhaps start with a discussion on cost of funding.


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