Customers fall behind in big bank priorities: former RBA boss
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.
Frequently Asked Questions about this Article…
Yes. Former RBA governor Bernie Fraser says the big banks have had scope to cut mortgage rates independently of the RBA and still do. The article also notes analysts and the head of the Australian Bankers’ Association saying lenders might cut rates on their own if funding markets improve or competitive pressure increases.
According to Bernie Fraser, the big four have prioritised shareholder returns over customer rate relief. The article points out home‑loan customers of the big banks received an average cut of 0.93 percentage points in the past year, while the RBA lowered the cash rate by 1.25 percentage points — a gap Fraser links to bank pricing decisions and stronger bank profits.
Yes. The piece says banks have enjoyed a run of record earnings in recent months and that mortgage pricing decisions were a key reason for earnings growth. UBS and others described banks as in a “purple patch,” with Commonwealth Bank reporting wider profit margins and ANZ, NAB and Westpac likely benefiting from fatter mortgage margins.
The article questions how strong mortgage competition really is. Bernie Fraser said the big four are not demonstrating vigorous competition, while RBA governor Glenn Stevens said there’s ‘probably’ room for more mortgage competition even though deposit competition remains intense and costly for banks.
RBA governor Glenn Stevens noted competition for deposits is ‘very intense,’ which raises banks’ funding costs. The Australian Bankers’ Association added that if funding markets continue to improve, banks might feel able to cut mortgage rates independently. So funding costs and deposit competition are important constraints on how quickly banks pass on rate cuts.
The article reports a UBS brokerage note warning that banks could face the risk of government intervention if they remain in a prolonged ‘purple patch’ and fail to make their own mortgage rate cuts outside the RBA cycle. That comment reflects concern over high bank profitability and public scrutiny.
Investors should watch bank profit margins, public statements about mortgage pricing, changes in funding costs, RBA cash‑rate decisions, and any signs of independent mortgage rate cuts from major lenders. The article highlights Commonwealth Bank’s recent wider margins and suggests ANZ, NAB and Westpac likely benefited too — all useful indicators of how pricing is affecting bank earnings.
The article quotes former RBA governor Bernie Fraser (now chair of Members Equity Bank) saying big banks have room to cut rates but prioritise shareholders; RBA governor Glenn Stevens saying there’s probably room for more mortgage competition but deposit competition is intense; Australian Bankers’ Association chief Steven Munchenberg saying independent cuts are conceivable if funding improves; and UBS analysts warning of potential government scrutiny if banks don’t act.
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