Business Sector Marginalised – March 2010 Business Banking Report

The gloom of financial turmoil in recent years has yet to clear completely, however it has lifted somewhat and this has reduced pressure on the business sector. Confidence still remains low, but the business sector continues to move forward despite these adverse conditions.

It is interesting to look at interest rate margins to illustrate the situation. About two years ago, business owners taking out loans secured against their residential property could enjoy the same interest rates as charged on a typical variable rate mortgage. In these past two years the cost of business borrowing has increased, since May 2008 the margin between business loans and mortgages has been widening and in January of last year peaked at a margin of 1.73%. Since that time the margin has narrowed again by around 50 basis points. The environment under which these margins arose saw large increases in the cost of wholesale funding and borrowers were very wary of taking on new lending business under such uncertain conditions.

Today, taking an average of four major and four regional banks, business loans are now priced at 1.23% above residential home loans. For many business owners this margin is still too high, but it does now appear that the gap is narrowing. It appears that banks are keeping business loan rate increases to a minimum, despite increases in the RBA official cash rate.

Looking more closely at interest rate changes

Let us look more closely at interest rate changes. Of these four regional and four major banks, three raised their rates above the RBA rate, three increased their rates by lower than the RBA rate increase and two remained unchanged. Looking at business loan rate movements since the last analysis we can see that the average rate increase on variable rate business loans secured on residential property was 0.614%, 13.6 basis points less than the RBA rate.

It is also worth noting that the banks with the largest recent rate increases were in fact those who kept the lowest interest levels when RBA rates hit lows in 2009. For example, Commonwealth Bank had the second largest increase of 87 basis points, but they still retain the lowest interest rate of the eight banks under our analysis.

Recovery is underway, and as the cost of wholesale funding becomes more stable, it is likely that we will witness the continued narrowing of these interest rate margins. However, this recovery will be a slow process, and for small business owners with loans secured on residential property, more pain could still be on the way.