8 Mar 2011

Retail banks' interest margin surges

7:21 am on 8 March 2011

The interest margin being made by the retail banks surged in January to pre-credit crunch levels.

New figures from the Reserve Bank show that the margin banks are earning has risen in nine of the past 10 months.

The difference between the interest rate the banks lend at and the rate they pay to borrow to fund loans is now 2.2% - its highest since the financial crisis hit in late 2008.

The banks earned $1.8 billion more in interest than they paid out in the three months to January, up from $1.6 billion a year earlier.

A partner at the accountancy firm, KPMG, John Kensington, says banks' borrowing costs increased during the downturn.

But, he says, margins also rose as banks increased mortgage rates relative to their borrowing costs in order to compensate for the higher risk of borrowers going bust.

"Margins will eventually come back down because at some point there will be an economic upturn and the pressure will be on the banks to gain new customers. At that point they'll have to be less margin-conscious and more volume-conscious.

"If the economy does not improve or even goes down, you may see margins go up again."

A Massey University banking lecturer, Claire Matthews, says a higher proportion of people on floating mortgages also fattened margins.

She says the banks have been compensating themselves for the higher risk of floating rate customers paying back early as interest rates rise again.