Yawn: Of course banks won’t pass on full rate cut

Why would they? The so called “political pressure” to do so is gone. ScoMo and Recessionberg are banking and property patsies. As well, with each new interest rate cut below 1.5% net interest margins get squeezed. Formerly from Goldman:

…if the cash rate was to fall below 1.50%, every additional rate cut thereafter would shave about 5 bp off sector margins. The sensitivity of margins to falling rates accelerates once the cash rate falls below 1.50% because the various levers the banks have at their disposal become less flexible as the cash rate approaches zero and we would particularly highlight the following:

Our expectation is that term deposit (and cash management to a lesser degree) pricing will become quite sticky as the cash rate falls below 2.0%, as was the experience in the both the United Kingdom and Canada in 2008/09. This will particularly be the case as the domestic banking regulator, APRA, shifts its focus in 2016 towards the Net Stable Funding Ratio (NSFR), which is likely to place pressure on the banks to both term out and improve the quality of their funding (i.e. preference for deposits over wholesale). Furthermore, we note that the recent move out in funding costs has historically correlated with higher rates being paid by the banks on deposits (Exhibit 2).

We estimate that the replicating portfolio represents about a 5bp p.a. margin headwind for the banks over the next 2-3 years.

Given all major banks expect another rate cut to a 75bps cash rate, and probably suspect we’re going to 50bps, why would they pass it on? We have to go through the motions of pretending though, via the AFR comes Karen Moley:

Still, senior executives at some of the big banks may decide that now is not the appropriate time for tough-minded commercial decisions.

The Commonwealth Bank, for instance, can afford to be magnanimous in passing on the rate cuts because it enjoys a higher return on equity than its rivals.

Bankers fear that CBA boss Matt Comyn may decide that it’s worthwhile earning some political credit by passing on the full rate cut, even if it means sacrificing some shareholder return. Especially as this would give him the added satisfaction of watching his rivals squirm.

The only question is whose turn is it to wear a little egg by not cutting first.

Latest posts by David Llewellyn-Smith (see all)

Comments are hidden for Membership Subscribers only.