How banks have been screwing depositors

If you look at the fine print at the back of their official reports and crunch the numbers you’ll see how banks have been boosting their profits and screwing depositors.

The National Australia Bank, ANZ and Westpac have all ‘fessed up: we used the Reserve Bank rate hikes to screw depositors – but not as much as we could have done.

Well, of course, they did no such thing – ‘fess up that is.

You have to go into the fine print right at the back of their official reports to find the numbers, do some calculations, and arrive at the conclusion I did.

Now, the RBA started raising rates at the start of May; so there were five months of rising rates in their September half-years for NAB, Westpac and ANZ, the three of the four big banks that balance at end-September.

Westpac generated an extra $2.84bn of interest income from its borrowers in the September half compared with the preceding March half.

It paid an extra $2.26bn to its depositors in the half.

The near-$600m difference went straight to the bottom line.

NAB generated an extra $4.39bn in interest income in the September half compared to the March half.

It paid out an extra $3.7bn to its depositors.

The Ross McEwan-led NAB generated an extra $4.39bn in interest income in the September half compared to the March half.

So NAB took just under $700m extra of net interest income to its bottom line for the half.

The numbers for ANZ were: $4.2bn of extra interest income; $3.52bn of extra interest payments to depositors; and so an extra $674m to the bottom line for the six months.

With rates continuing to rise in the current March half year– we’ve had two 25-pointers already - we will see a repeat of all this in their next half-year reports, as the banks raise their lending rates faster and further than they do their depositor rates.

These three banks are all roughly the same size – each with assets of just over $1 trillion – so how come the NAB and ANZ increases were much bigger than Westpac’s?

The answer is that NAB and ANZ have relatively bigger business banks, where rate rises were passed on faster.

That was not because the banks were being kinder to their home loan borrowers; simply, that they could not pass on the rare hikes at all to those with fixed-rate home loans.

The arithmetic of that also meant that they ‘had to’ – and did - screw even more out of depositors than those raw numbers show.

This protection, though, lasts only as long as the term of the fixed-rate loan.

As soon as they expire, those borrowers will get hit with all the rate rises that have been delivered by the RBA since May, whether they re-do fixed or go variable.

The feared ‘mortgage cliff’.

It also means the banks have a built-in profit booster that will play out each six months for some time into the future, with rising rates and fixed-term expiries.

On the other hand rising interest rates are also going to start bringing bad debts.

For the first time since the early days of Covid the banks are beginning to actually provide for bad debts.

So far those provisions are tiny against operating profit.

But they will grow in size even if the economy does not plunge into recession, and will surge if it does.

The banks actually had a ‘golden Covid’.

First-off, they panicked and massively over-provided in mid-2020 for losses that never arrived.

They then spent the next two years writing those provisions back and boosting their reported bottom lines.

Then the RBA’s zero-rate and money printing was a profit twofer for them.

They were able to borrow from depositors at zero or near zero while still generating 200-point-plus margins on their lending.

Secondly, of course, all that ‘free money’ produced a home loan lending boom, which was great for profits through 2021 and 2022, but whose chickens are now coming home to roost.

Originally published as How banks have been screwing depositors