Cameron Clyne's messy breakup

It wouldn't be surprising if the bosses of our big four banks now find that it's much harder to sleep at night: it's now clear that the banking game is getting a whole lot tougher.

The biggest problem that the banks face is that they can no longer sit back and watch their profits balloon on the back of big double-digit increases in their loan books. The latest Reserve Bank figures show that total lending by the banks expanded by a sluggish 3.5 per cent over the year to February.

At the same time, the big banks can no longer rely on falling bad debts to provide a handy fillip to their profits. Loan losses have now dropped to the low point of the cycle, and the bosses of the big banks will be watching nervously to see whether problems in some areas of the economy – such as tourism, property and retail – cause their problem loans to start climbing.

And the pressure on banks' funding costs shows no sign of abating. The big banks are now competing aggressively to attract deposits, and have lifted the interest rates they pay on deposits, while renewed turmoil in Europe has made it more expensive to borrow money offshore.

As a result, the big four banks are now finding that they're only making wafer-thin profits on the new home loans that they are writing.

But ANZ boss Mike Smith and National Australia Bank boss Cameron Clyne have even more reason for losing sleep than their Sydney-based rivals.

That's because in the wake of the financial crisis, Commonwealth Bank and Westpac pushed aggressively into the home loan market and stepped up their mortgage lending. As a result, the two Sydney-based banks are now sitting on a large book of home loans that were written in 2008 and 2009, and on which they enjoy healthy margins.

In contrast, ANZ and NAB scaled back home lending in the immediate aftermath of the crisis. Instead, they decided to chase market share in 2011 and 2012, at a time when the home loan margins were under pressure.

This means that ANZ and NAB are now extremely exposed to the strains of higher funding costs.

Last Friday, ANZ Bank buckled under the pressure and decided to raise its home loan rate by 0.06 of a percentage point. This move means that ANZ has now increased its home loan costs by a total of 0.12 of a percentage point this year, more than its competitors.

Predictably, the bank copped a tongue lashing from the Treasurer, Wayne Swan, who noted that "there would be a lot of ANZ customers very upset about this decision by ANZ to jack up rates, coming after their recent massive profit announcement and staff sackings.”

Following the ANZ's move, other major banks signalled that they are reviewing their rates. In particular, NAB's Cameron Clyne is likely to have spent a great deal of time over the weekend pondering whether he should risk the Treasurer's ire by following ANZ's move.

The problem for Clyne is that he's under growing pressure from some of NAB's big shareholders who are unhappy that the bank is offering discount mortgage rates as part of its controversial 'break up' campaign.

They believe that the bank is making little or no profit from the new home loans that it's making, particularly since the NAB is heavily reliant on expensive wholesale deposits to fund its new home loans.

Clyne now faces the tough choice of whether he should maintain his stance as a banking rebel, or whether he should pacify restless shareholders by admitting that he's much more like the other big banks than he's so far conceded.