IN THE year to September 2007, just before the global financial crisis, Australia's big four banks made after-tax profits of $16.6 billion. People thought that was huge. Ian Macfarlane, former governor of the Reserve Bank, used to wonder how Australia's banks made such big profits.
In the year to September 2011, the big four made after-tax profits of $24 billion. Many, perhaps most, Australian businesses are doing worse than in 2007. Yet the banks now make profits almost 50 per cent bigger than at the peak of the boom. How much is enough?
ANZ's Australian CEO, Philip Chronican, says it decided to raise interest rates on home mortgages and small business loans by 0.06 percentage points because its margins in retail and business lending had been squeezed in recent months. I don't doubt him, but since when have banks seen these margins as fixed?
Not in the Howard/Costello era, when from 1997 to 2007 they moved in lock step with the Reserve Bank, passing on each rise and fall in the bank's cash rate, no more, no less. That had nothing to do with funding costs or margins. They were just too frightened of Peter Costello to step out of line.
Not since the GFC came. It broke their business model, so they had to raise their margins. The government guarantee and a history of sensible lending allowed them to sail through the GFC with profits only slightly lower. But once out of danger, they kept raising margins; and now their profits have soared.
Yesterday's moves were modest: on a typical mortgage, $13 a month from ANZ, $20 from Westpac. Mortgage holders are the lucky ones. You can go to the bank and demand a discount, or walk out and take one of the many cheaper loans available on the web (websites such as Canstar or InfoChoice can point you to them).
Small businesses are the captive customers. The Reserve tells us that in January, the big banks' average rates were 6.59 per cent on mortgages, 6.70 per cent on big business loans, but 8.25 per cent on small business loans. Small business can't just walk over the street and be sure of finding another loan. And it's their profits the banks are taking.
One question: will the banks pledge to reduce their interest rates in future whenever funding costs fall?
