Competition, turbulence to keep bank costs ‘up for years’

Bank on it: There is a price to pay.TWO of the country’s biggest banks have warned that funding pressures will keep climbing for years to come, setting the scene for more disputes over their mortgage rate decisions.
Nanjing Night Net

Despite bankers previously predicting funding costs would cool off from this year, ANZ and Westpac executives yesterday said there had been no let-up in offshore turbulence or competition for deposits.

Instead, banks would be forced to pay a premium to access funds overseas for another five years, the acting chief operating officer of Westpac’s financial services division, Jim Tate, said.

The predictions, which suggest banks are unlikely to pass on any further official interest rate cuts in full, were made before a Senate inquiry into how the global financial crisis has changed banking.

ANZ’s deputy chief, Graham Hodges, said the biggest pressure on its cost of funds was the fierce competition for deposits, which continued to heat up. Banks obtain about half their funding from deposits, but are looking to lift this to 60 per cent, forcing them to offer higher interest rates to savers.

The competition for funds, alongside jittery overseas markets, would continue pushing up the banks’ costs for the next two years, he said.

”The overall impact at this stage looks as though we’ve got another two years where costs will continue to rise step by step,” Mr Hodges said in Sydney.

Westpac’s Mr Tate told the inquiry there would be no let-up in overseas lenders’ demands that Australian banks pay extra for borrowed funds.

Big banks were paying 1.5 percentage points over the benchmark cost to access long-term capital markets, he said, compared with 0.25 percentage points before the 2008 financial crisis.

”You would think that under normal, ongoing, quite predictable growth, that spread would come in, but we’re not at that point and we’re a good five years away from being at that point,” Mr Tate said.

In 2010, Westpac chief executive Gail Kelly said her best guess was that funding costs would cool off from this year.

Commonwealth Bank group executive David Cohen also said the competition for deposits had made bank funding more sustainable. But the relatively high taxation of income earned from interest was limiting the role of deposit funding.

Mr Cohen also defended the bank against claims its $2 billion takeover of BankWest at the height of the financial crisis had harmed competition, saying the deal saved Australia from a financial shock.

While bank costs are rising, banks are no longer enjoying rapid credit growth that fuelled bumper profits before the global financial crisis.

The Reserve Bank’s assistant governor, Guy Debelle, said that after mortgage growth of almost 20 per cent early last decade, credit was more likely to expand at the pace of the broader economy.

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