Aussie banks jack up lending margins by up to 500%

Trinidad Times Saturday 5th September, 2009

Australian banks recently made headlines by saying they were foregoing various fees they charge,

What they did not say is that in recent weeks they have been routinely increasing margins, or line fees, on corporate borrowers with floating interest rate loans.

All the major banks have unleashed revised margins with increases ranging from around 100% to around 500%. In many cases the new margins have more than doubled interest costs on loans.

The banks argue the revision is needed because of increased costs of funds. However most floating rate lending is done on commercial and bank bills at market rates.

In the lending boom leading up to the recent financial crisis, Australian banks joined the international charge in shaving margins, in many cases to below 1%.

Now the banks, with funding scarce, and borrowers having limited scope to refinance elsewhere, are jacking up margins by 2, 3, 4 and 5%.

A small business borrower on a prior margin of 1.5% on current cost of funds at 3.5% would be paying $50,000 in interest a year. An average increase in margin to 4.50% would see that small business now paying $80,000 a year.

A major corporation with a loan of $250 million on similar margins would see borrowing costs increasing from $12.5 million a year, to $20 million a year.

This at a time when the economy is weak, revenues and profits are depressed, and the outlook uncertain.

ANZ Bank this week said it was positioned to deliver a stronger than expected full-year profit after revealing its interest margins on lending had improved since March.

All the Australian banks rose strongly this week after that report. NAB is now up 40% for the year, Commonwealth Bank 67%, ANZ 42%, Westpac 47%, and Macquarie Bank 73%.