Widening gap between rates fuelling bank profits, says P2P lender

Recent analysis of the Reserve Bank of Australia’s data undertaken by RateSetter found a widening gap between deposit and consumer lending rates.

RateSetter outlined that the average fixed personal loan rate offered by the big four banks is 12.24 per cent per year, while customers earn just 0.5 per cent to 2.4 per cent per year on savings and term deposits, resulting in an average gap of 11.52 per cent per year.

The gap between savings and standard credit interest rates for the big four banks is higher, averaging at 19.09 per cent per year, according to the lender.

“Consumers know that the gap between what they pay to borrow money and what they receive when they have funds on deposit is excessive and is largely pocketed by the banks as profits,” RateSetter CEO Dan Foggo said in a statement.

The CEO added that the draft Productivity Commission report into competition also recently called out the big four banks for this disparity, which he said was tantamount to “exploiting their loyal customers”.

"[B]orrowers are paying too much to borrow while savers are earning next to nothing,” Mr Foggo said. 

The 640-page draft report, released by the Productivity Commission last week, noted that “much of what passes for competition is more accurately described as persistent marketing and brand activity designed to promote a blizzard of barely differentiated products and ‘white labels’.”

It says: “Publicly listed institutions are required to act in the interests of their shareholders when devising their competitive strategies. This means that they are motivated to keep prices high in order to deliver profits that are in line with market expectations. But if the market were competitive, such practices would cause consumers to switch to a lower-price provider, lowering profits and shareholder expectations. It is, at least in part, the stickiness of consumers with their current bank, insurer or adviser that allows these providers to maintain profits without loss of market share.

“Australia’s major banks have delivered substantial profits to their shareholders — over and above many other sectors in the economy and in excess of banks in most other developed countries post-GFC. In recent times, regulatory changes have put pressure on bank funding costs, but by passing on cost increases to borrowers, Australia’s large banks in particular have been able to maintain high returns on equity (ROEs).

“The ROE on interest-only investor loans doubled, for example, to reach over 40 per cent after APRA’s 2017 intervention to stem the flow of new interest-only lending to 30 per cent of new residential mortgage lending (reported by Morgan Stanley). This ROE was possible largely due to an increase by banks in the interest rate applicable to all interest-only loans on their books, even though the regulator’s primary objective was apparently to slow the growth rate in new loans. Competing smaller banks were unable to pick up dissatisfied customers from this repricing of their loan book because of the application of the same lending benchmark to them.”

The draft report added, however, that “it is completely unsurprising that, faced with the opportunity to reprice their loan book as a consequence of a regulatory changes, banks did just that. Shareholders expect that of their managers. But this additional cost impost — part of which (through the tax deductibility of interest on housing investment loans) is being paid now by all Australian taxpayers — was not an objective of the regulator and means that the intervention could have been better focused.”

[Related: Excessive premiums costing borrowers thousands: PC]