More out of cycle rate movements due to funding costs

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Rate cuts by the Reserve Bank are important however the good intentions seem to be a futile attempt as lenders fail to pass on cuts imposed by the central bank.

Latest report by the KPMG reveals that despite the continued good performance of Australia’s major banks on the global banking stage, they are still affected by the interconnection of new regulatory environment demands’ structural changes and the global funding markets. This could mean that there will be more out of cycle rate hikes happening in the future.

The Major Australian Banks Half Year 2012 report by the KPMG shows a healthy profit acquired by the major for the 2011-2012 half year although the acquired healthy profit lacked growth.

Andrew Dickinson, KPMG’s head of banking, stated, “The major banks’ profit clearly shows we have a strong banking system, however it must be viewed in light of the increased capital that the banks now need to hold. Return on equity (ROE) remains around 16 percent for most banks and shareholders will need to accept that this level of return is all they can expect for the foreseeable future.”

A total of $16.8 billion statutory profit before tax was recorded for 2011-2012 half year where as a total of $16.3 billion was recorded in 2011’s second half. “The banks’ biggest challenge is adapting their business model to cope with the competing strains of constrained lending growth, ongoing funding pressure, ever higher regulatory hurdles, and a transition to new mobile delivery channels and competitors,” shared Dickinson.

The major banks are still facing the challenge brought by the high cost of funding’s impacton margins. KPMG’s Head of Financial Services, Michelle Hinchliffe, stated, “Sustainable cost reduction remains a challenge for the major banks. While they are implementing a number of cost reduction measures, the full impacts are yet to flow through to the results. They need to make structural, long term changes that will sustain a lower cost base.”

KPMG believes that the condition of Australia’s major banks is still very much affected by the global markets’ economic uncertainty and by the funding costs.

Dickinson mentioned, “The global crisis in access to funding has forced the majors ‘back to the past’ where they are wooing domestic deposits to boost their funding. This means deposit competition is intense, and depositors are now being paid 2 percent more (relative to RBA rates) than before the GFC. It is these increased deposit rates which are now having the strongest impact on bank funding costs.”

Hinchliffe however stated that, “Australian banks are well capitalised, continue to maintain strong liquidity positions and are well placed to respond to new global capital and liquidity rules.”

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