Business Sector Marginalised - March 2010 Business Banking Report

Although the financial gloom has not evaporated completely, it has lifted and this has eased pressure on the country’s business sector. Confidence is still not terrific, despite the expected interest rate rise not eventuating in February but likely now to happen in March. Fluctuating markets and foreign currencies are still playing havoc with business growth but the sector soldiers on with resilience.

Interest rate margins tell the story. Two years ago, business loans secured against residential property were largely in line with the interest rates charged on standard variable mortgages. However, the margin started to widen in May 2008, peaking at a 1.73% difference in January last year. Since then, the margin has narrowed by 50 basis points. These margins developed in a time that saw wholesale funding costs skyrocket and lenders remain wary of taking on new lending business in uncertain times.

If we fast forward to the 1st of this month, the same business loans taken on the average of four major banks and four regional banks, show they are now priced at 1.23% above residential home loans. From the business owner’s point of view, it’s still 1.23% too much but it seems the gap is shrinking. The trend appears to be one of minimum rate rises on business loans, despite RBA official cash rate increases.

Putting interest rate movements under the microscope, we note that, out of four major banks and four regional bank loans under analysis, three raised rates above the RBA rate, two kept their increases to the RBA figure and the remaining three were below the increased figure.

A look at rate movements since the last analysis shows that the average rate increase for residentially-secured variable business loans was 0.614%, 13.6bp less than the RBA.

It should also be noted that the banks posting the biggest rate increases since October last year were generally the ones that had kept rates lowest when RBA rates bottomed during 2009. For example, despite passing on the second largest rate increase of 87bp to its Better Business Loan, Commonwealth Bank still retains the lowest rate out of the eight under examination.

Suncorp, Westpac and nab, who have all increased less than the RBA, have taken the first steps towards narrowing the margins that have developed between business loans and mortgages over the past 18 months.

As we march down the recovery road, and wholesale funding costs stabilise, we hope to see the margins close across the board. It is very early days, and this may well take a long time. For small businesses with loans to repay, there will be more pain before this happens, as it will be a result of restricted rate rises – not rate cuts.

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