The major banks are supercharging their profits at the expense of their customers, according to a leading acdemic. Their funding costs have fallen - not risen, which was their justification for not passing on Reserve Bank cuts.
These actions have hurt not only mortgage-holders but savers, small businesses and all bank customers, says Milind Sathye, a former central banker and now professor of accounting, banking and finance at the University of Canberra.
His research has debunked claims that the banks' high cost of funding has forced them to hold back rate cuts. The banks' three main sources of funding - deposits, long-term debt and short-term debt - have all become significantly cheaper in recent years, even as they were claiming the cost of borrowing was rising.
Since November 2011, the RBA has lowered the official cash rate 1.75 percentage points to 3 per cent. Over the same period, on average, the major banks lowered their mortgage rates by only 1.36 per cent (to the standard variable rate of 6.42 per cent). This means almost a quarter of the RBA's rate cuts have gone straight into the pocket of the banks, amounting to billions of dollars.
Professor Sathye's analysis also concludes that the greatest threat to the banks' profitability has come not from external funding pressures or from competition, but from blowouts in operational costs.
His findings follow a report by UBS Investment Research last week that said banks were in such a "purple patch" that they risked government intervention if they did not start making their own mortgage rate cuts outside of the Reserve Bank's cycle.
"Banks are now making more money from originating a mortgage than any time previously," UBS analyst Jonathan Mott wrote.
Deposits are the single largest source of bank funding. They contribute a bit more than half of funding, the Reserve Bank says.
The Australian Bankers' Association has argued that intense competition for retail deposits has been responsible for pushing up interest rates on deposits. Professor Sathye disagrees. He says deposit rates have fallen.
In fact, they have declined more sharply than lending rates, meaning that funding costs have fallen, not risen.
Professor Sathye cites the online savings account interest rate as easing from 7.3 per cent in July 2008 to 3.05 in January this year, a decline of 4.25 percentage points.
Meanwhile, term deposits fell from 7.95 per cent to 4.25 per cent in the same period, a drop of 3.7 percentage points as the RBA cash rate came down further, from 7.25 per cent to 3 per cent - a fall of 4.25 per cent.
Therefore, as the drop in interest paid by the bank is smaller than the drop in the rate it charges, the banks' profits have increased.
This shows up in their profit figures. Last year, the combined profit of the Big Four banks was more than $25 billion. This year that is forecast to rise to $27 billion.
The banks' strong performance on the sharemarket this year was no accident, Professor Sathye said.
"It is coming out of the pocket of somebody," he said, "and that somebody is the Australian borrower."
Even though people and business are borrowing less since the global financial crisis, and despite the rise in the banks' operating costs, profits have risen because of lower funding costs and fattening credit "spreads" (the difference between what banks pay for borrowing money and what they charge for it when they lend it).
"The majors continue to make record profits and at the same time harp on about high funding costs to justify their higher lending rates," Professor Sathye said.