No need for banks to cry poor. They are laughing

Debt Man column – The West Australian (Money)

For: February 22, 2010.

Bruce Brammall

Debt Man

In my 10 years of writing about the banking industry, I’ve been accused of being both a bank basher and a bank apologist.

The criticisms usually flip flop between the two, so I’ve never been worried about it. And now it’s about time to call a spade the load of crap that it is.

For more than two years, banks have been selling the message that they have been forced to put up their interest rates in excess of the RBA’s movements, because their cost of funding has increased and they were financially treading on thin ice, that the margins they’re making on loans is dangerously thin.

No need to swallow that rubbish any more – Australia’s banks are currently in no financial trouble. The chance of them failing is miniscule. And their interest rate increases are nothing more than price gouging and profiteering.

Australia’s banks are raising rates because they can. And because their competitors can’t compete.

What’s the proof? I’ll come back to that.

There’s pain happening in that place known as Newmortgageland. Interest rates are rising and, if you’re a relative newcomer to the home ownership caper, that can be unpleasant.

According to Fujitsu Consulting, the pain is spreading. Of the 251,000 Australians who have bought their first home in the last 18 months, about 101,000 (40 per cent) are suffering some sort of mortgage stress and 30,000 are suffering severe mortgage stress.

As rates rise, this number will get worse.

What’s made the stress situation worse in recent years, of course, is that banks have often acted independently of the Reserve Bank. When rates have been rising, banks have added on a little bit. When the RBA has cut, the banks have kept a bit for themselves. And sometimes the banks have just decided to slap on some extra just for fun.

So, when you’ve been copping it from politicians, the media and your customers for several months over a contentious decision (such as Westpac over its decision to go 0.45 per cent in December, instead of 0.25 per cent), sometimes you just want to retreat a little and get out of the spotlight while you lick your wounds.

Other times, when you’re a little bit out of sight and with friends, you just want to give them all the bird. You know, middle finger raised from clenched fist in target’s general direction. Like the gopher would have given to Bill Murray in Caddyshack if he had have been able to make a fist.

It was definitely the latter that Westpac was doing last week when it announced that it had made an unaudited profit of $1.6 billion in the last three months of 2009.

Westpac, of course, had many friends surrounding it when it delivered that bird. At last count, they had about 539,000 shareholders, mostly mums and dads. But all banks shareholders would have been cheering.

That profit puts them on track to post a whopper profit later this year, and was made essentially without that extra 20 basis point slap it gave customers from late December, which caused them all the bad publicity.

We swallowed the line from banks through 2008 and 2009 that their own cost of funding had blown out – that is, they were paying more to get the money to onlend to customers. There was the implied threat that they’d start collapsing like American and European banks.

If that was true at some stage, it’s now bollocks. The danger of a major Australian bank going bust – which was never particularly high – now looks as low as Guatemala’s probable medal tally at Vancouver. (Hint: Guatemala hasn’t sent any athletes.)

Westpac is on track to post a full year profit of around $6 billion. The other banks will do okay, thanks for asking.

Where does that leave us punters? Sadly, at the moment, without a lot of choice. If you want money, the major banks are the only ones with both money and security.

Second and third-tier lenders are struggling. Competition’s the poorer for it and we’re the losers. And until other lenders can get some money to grease the lending pipes again, customers have just got to try to ride it out.

Or become shareholders … and laugh all the way to the bank.

Bruce Brammall is the author of Debt Man Walking (www.debtman.com.au) and a licensed financial adviser. bruce@debtman.com.au . He owns shares in several major banks, including Westpac.