Customers fall behind in big bank priorities: former RBA boss
Former Reserve Bank governor Bernie Fraser says the big banks have room to cut their mortgage rates, but are failing to do so because they have put their shareholders' interests before those of their customers.
While lenders argued that they were striking the right balance among serving investors, savers and borrowers, when it came to mortgages, Mr Fraser said, the big four were putting their profits first.
With banks' run of record earnings continuing in recent months, some market analysts predict lenders will soon be forced to cut mortgage rates independently because of competitive pressure.
But Mr Fraser questioned the degree of "real" competition in the sector, saying the banks were earning much higher profits than other sectors and than their peers overseas.
"It's a question of the relative priority they attach to their shareholders and their customers. That's been the case right through the recent period when they haven't always passed on all the RBA moves," Mr Fraser said.
"They've had scope then, they have scope now, to [move downwards on interest rates] independently of the Reserve Bank. They've got room in terms of profitability; it's a question of their priorities, really."
Mr Fraser, who now chairs Members Equity Bank, was governor of the Reserve between 1989 and 1996 and before that secretary of the Treasury under the Hawke Labor government.
The Reserve Bank is widely expected to leave the cash rate unchanged at 3 per cent this Tuesday, but banks' strong profit growth in recent months has unleashed fresh scrutiny on mortgage rates.
Home-loan customers of the big four have received an average rate cut of 0.93 percentage points in the past year, although the Reserve Bank made a 1.25 percentage-point cut in the cash rate in that time, and these pricing decisions were a key reason for bank earnings growth.
RBA governor Glenn Stevens told a a recent parliamentary hearing there was "probably" room for more competition in mortgage lending, but that there was "very intense" competition for deposits, which drives up bank costs.
Mr Fraser described bank profits as "very, very healthy" and questioned how competitive the market was.
"I used to think that you could get competition with four good competitors, but they're not sort of demonstrating that belief of mine, really. I live in hope that one will take a lead one way and do something a bit more dramatic and that will spark a bit more real competition."
The chief executive of the Australian Bankers' Association, Steven Munchenberg, said it was conceivable that banks would eventually cut rates independently of the Reserve if funding markets continued to improve.
"It's a competitive market, demand for mortgages is low at the moment and that puts additional competitive pressure on the banks," Mr Munchenberg said.
The comments come after Commonwealth Bank last month reported wider profit margins in the December half, helped by mortgage pricing decisions and lower funding costs. ANZ, NAB and Westpac are also likely to have benefited from fatter margins.
Mr Fraser's comments follow a report from brokerage UBS that described the banks as being in such a "purple patch" that they faced the risk of government intervention if they did not start making their own mortgage rate cuts outside the Reserve Bank cycle.
"Banks are now making more money from originating a mortgage than any time previously," said UBS analyst Jonathan Mott.