"As I've said repeatedly I don't believe there is any justification for banks to hold back interest rate cuts in the present environment." Photo: Andrew Meares
In the debate about the merits of banks passing through interest rate cuts in full, there are now two clear positions.
On the one hand the shadow treasurer, Joe Hockey, has this week again said that banks should be able to hold back part of official rate cuts if they can come up with an excuse for doing so.
I can only assume he developed this approach when major banks held back large chunks of official rate cuts, or raised standard variable rates outside of the Reserve Bank of Australia's cycle, from 1997 until 2000, when Peter Costello was treasurer.
I take a different view. As I've said repeatedly I don't believe there is any justification for banks to hold back interest rate cuts in the present financial environment.
Now, it's true that during the global financial meltdown following the collapse of Lehman Brothers, which saw financial markets freeze up, the banks had a better argument for moving independently of the RBA.
However, financial conditions are now dramatically different to that cataclysmic time, and accordingly I have not hesitated to bell the cat when banks have made spurious claims that they cannot afford to pass through rate cuts in full.
For example, on Wednesday I noted that the NAB has let its customers down this Christmas, passing on only 20 basis points out of 25 and the same goes for the Commonwealth and Westpac.
In sharp contrast, ING has done the right thing by its customers this Christmas, passing on the full 25-point rate cut.
What this really demonstrates is that there's now much better value on offer for those willing to ditch their bank if it tries to take them for a ride.
It's now much easier to do just that thanks to a package of reforms we've put in place – like banning mortgage exit fees on new loans.
About 1 million home loans are now free of mortgage exit fees that the banks previously used to lock borrowers in – and that number will jump to 2 million by the end of next year.
And there's plenty of evidence that more borrowers are walking down the road to get a better deal from smaller lenders offering better value.
Smaller banks have grabbed nearly $20 billion in home lending business from the big banks since our reforms were announced in December 2010. In the year to September, non-major banks grew their home lending at almost three times the rate of the major banks.
This kind of trend is hardly surprising when you look through some of the spurious claims and consider the actual facts.
In doing so, it's important to look beyond some of the headline profit numbers – as huge as they are – to look at the key profitability metrics that the banks report to their investors.
Just yesterday, the Reserve Bank released its latest update on bank profitability which showed that the major banks' average net interest margin – essentially the difference between the rate they borrow at and the rate they lend at – is at about the same level that it was before the GFC.
These very healthy interest margins mean the banks are generating strong after-tax profits. In fact, when you calculate their latest net profits as a percentage of their shareholders' equity, the average return on equity for the four major banks stands at about 16 per cent.
Of course we all recognise the benefits of a healthy and profitable banking sector, but I'm sure there would be plenty of Australians pretty happy earning a steady 16 per cent after tax on their super!
By comparison, the RBA noted in its September Financial Stability Review that the return on equity for the largest banks in Britain, the US, Japan and the euro area averages only about 2 per cent to 8 per cent.
Of course we shouldn't lose sight of the impact of interest rate relief, even after you take into account what banks have held back from official rate cuts.
On the basis of present standard variable rates, a Sydney family with a $300,000 mortgage is now paying about $5000 a year less than they were when the Liberals were last in government.
If that family with the $300,000 mortgage kept their repayments at the same level over the past five years, they could now pay off their mortgage eight years earlier than they could have when the previous Liberal government left office.
Of course, house prices in Sydney can get a lot more expensive than that, and so do the savings increase the higher you go. A family with a $600,000 mortgage is paying about $10,000 less now annually than they were when Mr Hockey and Mr Abbott left office. That's real cost of living relief in anyone's books.
Wayne Swan is the federal Treasurer.
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