Lack of transparency 'fuelling distrust of banks'

Anger is building that Reserve Bank interest rate cuts are not being matched by banks in their mortgage rates.

And while available data and some commentators suggest there is little evidence that banks are padding their profit margins at borrowers' expense, a lack of accessible credible data may be fuelling distrust of the industry.

Since Reserve Bank Governor Alan Bollard cut the official cash rate by half a percentage point to 2.5 per cent on Thursday the only movement in mortgage rates has been Westpac's 0.4 percentage point cut to its six month fixed offering which takes it to 5.39 per cent.

Asked whether cuts to other key mortgage rates were imminent, Westpac and the other major banks replied with stock responses - "We continually review rates", "we are monitoring the market", etc rather
than anything truly informative.

Meanwhile, readers' views posted on Herald Online suggest many people believe banks are not passing on OCR cuts sufficiently.

That view has been backed by bank workers' union Finsec, whose general secretary Andrew Casidy on Thursday called for the banks to open their books so customers can see how much their bank is making from home loans.

"Banks should disclose their costs of borrowing and the interest rates they charge to the Reserve Bank, who could then publish this information in a comparative table," said Casidy.

"Customers could use this information to decide if their bank is being fair in what they charge and how this stacks up against other banks."

In fact two of the big four Australian owned banks, ANZ National and BNZ, reported first half results last week which contain relevant information on the profitability of their loans and also deposit-taking operations, which are different sides of the same coin.

As far as the data - which is audited and prepared in accordance with sharemarket and international financial reporting standards - can be relied upon it shows both banks lending operations were actually less profitable on a per dollar basis in the six months to March 31 compared to the same period a year earlier.

Both banks' net interest margin contracted.

The measure is essentially the difference between their cost of funds whether sourced from retail depositors or domestic and overseas wholesale money markets, and the average interest rate they charge across their book of loans.

At ANZ National, excluding its institutional business, which enjoyed a windfall gain on volatile markets, net interest margin went from 2.34 per cent to 2.10 per cent while at BNZ it went from 2.49 per cent to 2.23 per cent. Westpac will report its first half results this week.

Massey University head of banking studies David Tripe said the net interest margin figures contained in the banks' results were a reasonably good but by no means definitive indicator of how profitable their lending operations were.

He preferred to focus on data provided in their quarterly General Disclosure Statements.

Casidy, meanwhile, said although "you can argue that in a technical sense" the recent data suggested that banks were not padding margins "our issue is who understands that and how do you then use that to make a comparison to other banks?".

"Most customers don't have the financial knowledge to access that information."

The General Disclosure Statement regime is intended by the Reserve Bank to allow customers to monitor the performance of their bank and presumably compare it to others but the statements don't contain information on net interest margin although they do include data on return on assets which would be of some use to the financially literate with some knowledge of the banking industry.

Then again, with financial reporting standards chopping and changing constantly and banks changing their preparation and presentation of data, making meaningful comparisons between a bank's latest result and its previous ones, let alone to those of its competitors, is difficult at best.

"It's impossible for customers to understand if interest rates are fair when the whole process is so mysterious," said Casidy.

Grant Hasell, AMP Capital Investors head of fixed interest investments, does not think banks are being unfair or unjust in the margins they are charging.

"Personally I don't believe so. It's costing them an awful lot to borrow offshore. That is starting to correct a little bit now. All things being equal if funding costs continue to come down and official rates stay where they are the banks are going to be in a better position to pass on the cuts to the street."

But then again, Hassell, who closely monitors the same domestic wholesale money markets which mortgage lending is priced from, expects - as does RBNZ Governor Allan Bollard - that there should be some significant cuts to mortgage rates soon as a result of Thursday's OCR cut.

Rates on the swap market eased by about 25 to 30 points in the 24 hours following the announcement, with the five year rate down 4 basis points to 4.57 per cent on Friday and the two year rate down 30 basis points to 3.34 per cent.

"You'd expect that to be passed on to the retail borrowers at some point," says Hassell.