7 May 2012

Interest margins squeezed for banks

6:58 am on 7 May 2012

A war for deposits is having an effect on the bottom lines of retail banks in Australia.

Because the cost of wholesale funding has gone up due to the events in Europe, banks are increasingly relying on deposits to raise funds.

To do that, they have to offer tempting interest rates on term deposits of up to 6%.

Radio New Zealand's Sydney correspondent reports that in turn is squeezing their net interest margins and putting the brakes on earnings growth.

Westpac, for instance, delivered a fairly subdued 1% increase in cash earnings in the six months to the end of March.

And National Australia Bank passed onto borrowers just over half of the 0.5 point rate cut by the Reserve Bank of Australia on 3.75% last Tuesday.

The reduction was twice as much as the market expected. The RBA effectively admitted it had been caught out by the extent of the slowdown in an economy undergoing considerable structural change.

However, the official cash rate is still well above that of other developed economies.