Banks moving into the sweet spot of the cycle

After years of suffering from inexorable downward pressure on their interest rate margins – the difference between banks’ funding costs and what they charge on their loans – banks are in the sweet spot of the credit cycle.

Although banks have nudged the rates they pay on their at-call and term deposits higher since May, the statement points out “the average rate paid on at-call deposits – which make up the bulk of banks’ deposits – rose by less than the cash rate over the June quarter”.

But market interest rates have pushed sharply higher this year, and this has made it considerably more expensive to take out a new fixed-rate home loan.As the statement points out: “As fixed rates on new loans have increased to be noticeably above rates on new variable-rate loans, the share of new lending at fixed rates has declined and is now well below early-2020 levels.”

According to the statement, “housing credit growth remains around 7.75 per cent on a six-month-ended annualised basis”.Certainly, home lending slowed slightly in the three months to June, as the RBA’s rate increases dampened activity in the housing market and put downward pressure on home prices. In addition, banks are offering higher interest rates on new retail term deposits. And this is putting upward pressure on funding costs because when existing term deposits mature, the money is rolled over into new higher-rate deposits.What’s more, customers are responding to these higher rates by increasingly shifting their money out of at-call deposit accounts and into term deposits. As a result, banks’ funding from term deposits, which had fallen steadily since 2019, is increasing.

Senior bankers report they have seen a further drop in the number of credit card and home loan accounts where people are more than three months behind on their interest payments.

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