Banks margins under pressure

Low interest rates hit net interest margin says ANZ

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published August 16, 2013 1:07 pm AEST

Low interest rates are having a negative effect on bank margins, with ANZ Bank (ASX:ANZ) revealing that its net interest margin had fallen and was likely to narrow even further.

Net interest margin is a critical measure for banks, determining the difference between what it has to pay to borrow funds against what it charges on its loans. ANZ has reported that its net interest margin contract by 2 basis points in the June quarter, and was expected to fall by several more basis points during the September quarter.

ANZ management have blamed low interest rates for the majority of the contraction. As the Reserve Bank cuts official cash rates to historical lows of 2.5%, banks can cut their loan rates to remain competitive, but their funding costs may not come down, or down as much. Additionally, the banks can't cut interest rates on deposit accounts that already have zero or very low interest rates.

Commonwealth Bank (ASX:CBA) on the other hand, said its net interest margin had improved over the six months to June, although it may have deteriorated since.

The fall in net interest margin for ANZ seemed to spook the market, with ANZ shares down 3.1% in mid-afternoon trading. All the banks are trading down, with National Australia Bank (ASX:NAB) and the Commonwealth Bank losing 0.9%, while Westpac Banking Corporation (ASX:WBC) had slipped 0.6%.

Foolish takeaway

The big four banks aren't bulletproof, despite what many investors may think. Highly leveraged, and exposed to the vagaries of the economy, a sudden downturn or rising unemployment could see their earnings hit hard – along with their share prices. More interest rate cuts could also be on the way, adding further downward pressure to their margins.

Interested in our #1 dividend-paying stock? Discover The Motley Fool's favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of "The Motley Fool's Top Dividend Stock for 2013-2014."

More reading

Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned.

Automatic Renewal

By taking up this offer, you will also be enrolled in our auto-renewal program, which is our way of making your ongoing subscription easier by ensuring uninterrupted service. Don't worry, though – you're not locked in, and can cancel your auto-renewal at any time before each 'anniversary' date without question or penalty.