I recently read an article that the returns on three of Australia’s big banks’ savings accounts had halved over the past year and thought I’d share some insight as to why this happened. Having worked in the finance industry for 20 years you get an insiders perspective and I thought I'd explain how the recent Productivity and Royal Commissions were challenging how these institutions were being run.
In short, financial institutions make a large chunk of their revenue from the margin differential, that is, the difference between what they offer their deposit customers and the rate they loan their funds out to borrowers. So, for example, a bank may offer their deposit clients a rate of 1.5% and then lend those funds out to borrowers for 4%, making a margin of 2.5%. This may not seem much, however when you consider the major banks have a combined home loan book of approximately $845 billion, then that differential equates to approximately $2 billion. Then consider this is just for home loans and there are even larger margins to be made via business lending, personal loans, investment lending and credit cards.
I’ve attached an interesting article that articulates this in more detail and explores how the banks have passed on higher borrowing costs, reduced deposit rates and have preserved and in some cases expanded their margins.