With interest rates on many savings accounts and term deposits already at or approaching 0% p.a, many banks, particularly small customer-owned institutions, are expected to struggle to pass on future rate cuts to home loan customers.
Further rate cuts are on the horizon, with economists forecasting the RBA to cut rates once more in 2019, before cutting again in February 2020.
Some even expect the RBA to cut the cash rate to as low as 0.25% by mid-2020.
But Aussie mortgage-holders may be set to miss out on future rate cuts, given that many banks face a shrinking margin of interest between what they pay and what they earn.
Cutting the rates of interest paid out to savings account and term deposit customers typically helps banks to afford to reduce the rates of interest charged to home loan customers.
But as deposit rates approach 0% p.a, it becomes harder for banks to do this.
James Austin, Chief Financial Officer of prominent non-bank lender Firstmac, told Savings.com.authere’s a possibility certain customer-owned banks might struggle to pass future RBA rate cuts onto their customers.
Firstmac CFO James Austin. Source: Firstmac
“Transacting with customer-owned banks is a double-edged sword. On the positive side, they typically represent either local communities or specific industries,” Mr Austin said.
“However a negative is that the majority of customer-owned banks are small, relying almost entirely on customer deposits and transaction accounts for funding.
“A high portion of these deposits are already at a zero rate – they can’t reduce this cost of funding below zero.”
Mr Austin said smaller enterprises passing on more rate cuts would squeeze their net interest margins.
“There is no room for them to move,” he said.
Meanwhile, larger non-banks are expected to be in a better position to pass on further rate cuts, according to Mr Austin.
“Larger non-banks fund off wholesale markets. That has forced them to be far more efficient with their cost bases.
“If the RBA reduces rates, then the non-banks’ wholesale funds also reduces, so there is no impact to non-banks’ net interest margin if they pass on the rate cut to mortgage holders.”
The squeezing of smaller banks’ profit margins via cash rate cuts can also create the need for mergers.
For example, Perth-based P&N Bank will merge with bcu (Bananacoast Community Credit Union) in November, with merger documents saying bcu’s business would otherwise face increasing pressures on a standalone basis.
“In particular, bcu’s lack of scale and the requirement for ongoing investment in regulatory and mandatory technological change has meant that it does not have the necessary resources (staff and funding) required to develop and maintain an attractive banking offer (including digital),” it said.
But Customer Owned Banking Association (COBA) CEO Michael Lawrence says customer-owned banks are ‘well-placed” to deal with falling interest rates.
“Whether it’s a customer-owned banking institution or an investor-owned bank, a low interest rate environment is a challenging one for all financial institutions to navigate,” he told Savings.com.au.
“With retail deposits a key funding source for all banking institutions, net interest margin is under pressure in a falling interest rate environment.
“Customer-owned banks are certainly well placed to remain competitive with both lending and deposit rates given the model of being member-owned and are not under the same pressure as investor-owned banks that need to provide a return to their shareholders.”
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Customer-owned bank lending growing faster than the major banks
The need for the question “can customer-owned banks keep pace with RBA rate cuts” arises when you look at the latest data showing more customers flocking to such institutions compared to the big banks, relative to their size.
The latest Quarterly ADI Statistics released by the Australian Prudential Regulation Authority show customer-owned banks are growing at a much faster rate than the big banks comparatively, although they do have fewer assets.
The customer-owned banking sector’s housing loans grew by 7.8% to the June quarter, while the major banks grew by just 2.6%.
The big banks account for the majority of the $4.37-trillion mortgage market and wrote a total of $1.67 trillion in mortgages in the year ending June 2019.
A 7.8% increase in customer-owned banking loans means their combined mortgage book now sits at $91.3 billion, by comparison.
The number of deposits placed in customer-owned banks meanwhile grew by 1.7% to $103 billion.
Michael Lawrence said consumers want institutions that put their interests first.
“With growth rates like this it’s clear that word of our sector’s customer satisfaction scores, competitive interest rates and innovative services is spreading,” Mr Lawrence said.
“Australians want, and deserve, to be put first by their bank. Thankfully there’s an entire sector with a 150-year legacy of doing just that.
“These figures are a positive indicator of improving competition, but now is not the time to become complacent. If greater customer outcomes are the goal, then greater competition is the means.”
“After 12 months of scandalous hearings into banking misconduct and poor practices, it’s no surprise that our sector has seen growth rates like these,” he said at the time.
“These figures will be a wake-up call for the ‘Big Four’ and make them reconsider how they treat their customers.”
The table below shows a comparison of various home loans on offer from some of Australia’s largest non-banks, customer-owned institutions and the big banks.
Base criteria of: a $400,000 loan amount, variable, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. Introductory rate products were not considered for selection. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term. Rates correct as at 16 January 2020. View disclaimer.
The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:
- The big four banks are: ANZ, CBA, NAB and Westpac
- The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2019. They are (in descending order): Credit Union Australia, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
- The larger non-bank lenders are those who (in 2019) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.
Some providers' products may not be available in all states.
In the interests of full disclosure, Savings.com.au and loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.
*The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.
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