This story was first published with full access for subscribers only on March 7. Due to a technical error, now resolved, a large section of the story was omitted on first publication. FNArena is thus republishing the story to rectify the error, with access for all readers. Please note prices quoted are referenced from March 7.


- Banks trading above consensus target prices
- Mortgage pricing set to come under pressure
- Yields provide support
- Beware the election year


By Greg Peel

As Shaun Micallef noted recently on his satirical current affairs program, "If a week is a long time in politics, then six and a half months is a [expletive deleted] eternity".

If it's not bad enough that the longest running election campaign in Australian history has now begun, and that we'll all be subjected to months of attack ads and generally relentless waves of nausea, those of us not living in four particular electorates in Sydney effectively have no vote. Low mortgage rate demands and attacks on banks will be dominant features despite the ever growing cohort of Australians relying heavily on interest income.

Australian banks will soon be feeling, if they're not already, like bushwalkers in a NSW state forest wearing targets on their backs. Last week former RBA governor Bernie Fraser criticised the big banks for putting shareholders ahead of customers by not cutting mortgage rates when there's plenty of scope to do so. The banks, he implied, have become just too profitable.

Research from UBS, among others, supports Fraser's profitability claim. Twelve months ago, UBS notes, Australian banks were actually losing money on new mortgages. Banks' cost of funding has nevertheless dramatically reduced in the interim, to the point of which "writing new wholesale funded home loans has never been more profitable," the analysts declare.

Such public debate from Fraser is exactly the sort of fuel that will help fire up the familiar bank collusion claims from politicians that will help whip the masses into a frenzy during the election campaign. Twelve months ago, as UBS would attest, the banks had due cause not to cut their mortgage rates by as much as the RBA was cutting its cash rate. Today that is not the case. The last thing Australian banks need is actual political interference. They know full well the cretins in Canberra these days would sell their mothers for electoral victory, and thus would have no qualms in satisfying the blood lust of the great unwashed. (Even though every working Australian is by default a bank shareholder, unless they choose otherwise.)

Ironically, the banks have arguably never been more competitive. Australia's electorally limited focus on borrowing rates ignores the fact the banks have not been dropping their deposit rates by levels implied by RBA cuts either. Those Australians not living exclusively in swing seats have been beholden to term deposit rates for a few years now, and on balance those seeking income have done well. Fierce competition among banks for deposits, which offer cheaper funding for the banks than offshore wholesale borrowing, has ensured comparatively attractive returns on one of the safest possible investments.

Unfortunately for retirees, those days are now numbered. Wholesale funding costs, as noted, have fallen. The need for banks to offer above-market deposit rates has diminished, and already rate reductions are sneaking in. We know that banks can be competitive ? look at NAB's "Your dumped" campaign, which successfully parodied Australia's lack-of-competition obsession, and ANZ's decision to no longer tie its lending rates to the RBA cash rate, as well as the deposit war. We also know they do tend to hold staring competitions when it comes to mortgage rate reductions. When one blinks, finally they all blink.

They haven't blinked, yet.

Which has been great news for shareholders. As the recent interim result releases and quarterly updates from the banks attest, bank earnings have grown despite little to no growth in lending books. Aside from operational cost cutting, growth has come from cheaper funding. Solid earnings have allowed the banks to maintain attractive, fully franked dividends. And the investment community, both domestic and international, has been very hungry for yield. The result? The following is a chart of the ASX financials ex-REITs sector (note that the big banks very much dominate the weightings within this index):