Here’s a message for all those out there who are silly enough to think that banks are not being self-interested by screwing homeowners and personal customers whenever they can.
Us individuals, whether holding a housing loan, a credit card, personal loans (which together form only 5% or so of the banks’ total assets) are feeling hard done by as the banks grab every opportunity to fatten their profit margins in the name of prudence.
They have refused to cut home loans by the most recent full 0.25% and have not cut small business, credit card or personal loan rates by anywhere near the same amount as they have cut home loans.
Of the 4.25% (425 basis points) in rate cuts by the Reserve Bank since September, the Commonwealth has so far passed on 394 (3.94%) points and NAB 387. ANZ and Westpac have made 380 points of cuts.
So while the CBA has been rightly bagged for only passing on 0.10%, it’s been the most generous: while holier than though Westpac and the struggling ANZ have been the greediest.
But take a look at the way the banks have treated Rio Tinto, the struggling mining giant.
It revealed this week that it was in the process of raising $4.80 billion in fixed rate bonds in an international issue broken down into two parts.
The miner said it had priced $US2 billion of five year and $US1.5 billion of 10 year SEC registered securities. (That means they can be sold into the US market)
The 5-year notes pay a coupon of 8.95% and will mature on 1 May 2014. The 10-year notes pay a coupon of 9.00% and will mature on 1 May 2019.
They are high rates, but then Rio is a basket case at the moment thanks to poor management etc. (They are also said to carry moveable rates in that there’s an adjustment of 0.25% for every notch move in the Rio credit rating.
If Rio does the Chinalco deal, the credit ratings will improve, and the interest cost will fall, if it doesn’t the rating could be cut, and the rate will go up).
A ‘variable’ loan.Now that’s a novel idea, but it’s a bit more to do with the campaign over the Chinalco deal, plus the nervousness of the banks funding Rio.
But the deal also means Rio will probably have enough to repay this year’s $US9.8 billion loan repayment and it can then worry about next year’s.
But even with all its might and the Chinalco deal safely done, Rio will still be assessed as a worse credit risk than the ordinary Australian homeowner with a mortgage.
You can see that in the big difference between interest rates. It’s all in the assessment of ‘risk’ and the prospects for repayment.
Put it bluntly, rio is a more risky borrower than the average Australian home buyer.
If you or I want to be mad enough to borrow like Rio did for a ‘fixed’ rate for a home loan in Australia, the Commonwealth will charge you 6.39% for the five year loan or 6.99% for a 10 year loan.
The standard variable rate is 5.64% from the CBA. Those are rates typical for the industry give or take a few points.
The difference reflects the superior credit record and standing of the Australian mortgage holder, but the way the banks are treating us at the moment, you’d have to argue that they are not doing very well.
Incredibly they want to charge more, according to a crazy statement from the Australian bankers Association.
They reckon they might lose more in the slowdown, so they want to make more to protect themselves. (From themselves, more likely, they are the ones that lend the money, we just borrow it).
It’s something to keep in mind when next you hear a bank bleating about rate cuts pass throughs and funding costs.
It’s mostly hot air and fibs, and we have a right to moan and complain.
After all, it’s our money that’s helping the buggers keep afloat, but they forget that. And our guarantees (as taxpayers).
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In fact research this week from Goldman Sachs JBWere shows that all this talk from the banks about compressing interest margins is well rubbish.
Goldman Sachs JBWere said the major banks have expanded the spreads charged on standard variable rate mortgages – the margin between the interest rate charged to borrowers over RBA’ overnight cash rate – since the credit crisis began in 2007.
Analysts Ben Koo and Elizabeth Rogers said spreads have widened to 276 (2.76%) basis points over the cash rate compared to 182 (1.82%) basis points spread in December 2007.
"This implies a 94 basis points spread expansion benefit for the banks through out-of-cycle pricing," they said in a note to clients this week.
Spreads on loans to companies have swelled between 200 (2%) basis points and 500 (2%) basis points since the start of the credit crisis, they said.<
