So now we know.
Or, at least, we have confirmation of what we thought we already knew.
If you know what I mean.
The Reserve Bank of Australia's official cash rate is now 25 basis points lower, at 1.25% — a new record.
Cue the comedy:
One of the big banks cuts its rates.
Then the others follow, along with the regionals, minor banks and credit unions.
Then… wait for it…
Yep, here's the Treasurer, reading from the official Australian Treasurer for Dummies book, as quoted in the Nine papers, taking aim at Australia and New Zealand Banking Group (ASX: ANZ), which didn't pass on the full cut:
"I think their customers have been let down by this decision,"
"Here was an opportunity, post the royal commission, to do the right thing by your customers,"
That job done, of course, they can all get back to business.
What is interesting, though, is that the Big 4 have been split right down the middle. Commonwealth Bank of Australia (ASX: CBA) and National Australia Bank Ltd. (ASX: NAB) are passing on the full rate cut.
ANZ and Westpac Banking Corp (ASX: WBC) are keeping a little for themselves.
To be fair — and trust me, it's a thankless task being fair to Australian banks! — there's some justification for not passing on the full rate cut.
You see, it varies by bank, but a sizeable minority of Australian banks' loan book is funded by overseas markets. We Australians want to borrow — and there's just not enough local savings to support that appetite. So our banks head overseas — mostly to the United States (US) — to top up the coffers.
The problem is that while the RBA held, held, held, then finally cut, US interest rates have been heading upward. Which is a problem.
Here's why: let's say you're making a loaf of bread. And, bakers forgive me, let's assume the recipe is half flour and half water.
The Reserve Flour Association announces a cut in the cost of flour by 10%. The gluten-tolerant of Australia cheer, and wait for the price of their bread to fall by 10%.
But there's a problem. You see, the water is imported (this is high-end bread, you understand). And the price of that water has been increasing.
"But the flour price is down!" thunders the Treasurer. "The Big Four bakeries should pass that cut on to consumers!"
We all know it's not that simple. Costs, in total, may have actually increased, even if one of the ingredients is now cheaper.
Now, if you'll forgive the half-baked analogy, that's the problem with interest rates.
Yes, the RBA's official cash rate is the single largest influence on bank funding costs, but it's not the only one.
Frankly, there's a very strong justification for banks to keep some of the RBA rate cut, to help offset the rising costs from overseas.
Of course, the banks have done themselves no favours in the past. So much wrongdoing. So many opaque products.
So many Australians paying well over the odds for their mortgages.
I don't feel sorry, at all, for the banks. They deserve all of the grief they get.
But it's also important to be unbiased and to report fairly. Bandwagons are all too full in these days of confected social media outrage.
But back to the banks.
The split in the decision by the Big Four highlights just how tough it is to find growth.
ANZ and Westpac have opted to, at least for now, shore up their numbers by grabbing a little bit of extra margin.
CBA and NAB, we assume, believe that either they can take enough market share to offset falling margins, or — in NAB's case, at least — have had enough of being Public Enemy Number One for a while, and are trying to rehabilitate the bank's battered reputation.
And here's one last issue for the banks. You know that local 'deposit' funding that the banks love? Savers are already earning almost nothing on their balances so, unless banks want to start charging us for looking after our money — there's not much room to reduce those interest rates, either.
A bank's equivalent of 'gross profit' is its 'net interest margin' — and is the difference between how much it charges borrowers and how much it pays (in deposit interest and through overseas money markets) to get the money it lends out.
The former can't go any lower, and, as I said earlier, the latter has been going up.
If I was a bank CEO, I think I'd have sided with Westpac and ANZ. Consumers are very unwilling to switch banks at the best of times, so staking your future on gaining market share is a tough way to make a quid.
On the other hand, remember that the 'standard variable' rate is largely, if not entirely, useless when it comes to judging interest rates.
I don't know what percentage of each bank's customers are paying that 'headline' rate, but I would guess it's low single figure percentages.
Each bank has so many different types of loans, with different rates, for different purposes and different borrowers, that it's hard to really tease out how impactful the announced changes will have.
The banks — and their shareholders — have something of a tightrope to walk. They have to keep the public and the pollies on side, keep their funding costs in check, and try to find a way to maximise the rate they charge borrowers.
I don't know about you, but that feels like a devilishly difficult job — something akin to a choice between the devil and the deep blue sea.
Competition might not exactly be cut-throat in Australia, but the banks have limited ability to set their own prices.
Businesses that do? Well, that's pricing power, and it's one thing we look for when we're investing, here at The Motley Fool.
If you can find a business with pricing power, that can raise its charges with little- to no customer pushback… well, that's a very good sign.
Consider the ever-increasing price of Treasury Wine Estates Ltd (ASX: TWE) Penfolds Grange. Or the tolls being charged by Transurban Group (ASX: TCL). Consider the price premium of Telstra Corporation Ltd. (ASX: TLS) or Blackmores Limited (ASX: BKL). And how many retailers would cease offering Afterpay Touch Group Ltd (ASX: APT) if it jacked up its fee?
Pricing power isn't everything, of course. There are other business factors to consider, and valuation concerns to deal with.
But, all things being equal, I'd rather have it than not. The next 12 to 18 months will tell us whether we can add banks to that list.
Fool on!
