A Reserve Bank report into banks' interest margins has found that they have grown during the global financial crisis.

Australian banks increased their interest margin (the gap between the rate they borrow for and the rate they lend at) by an average of 9 basis points (0.09 percentage points) during the peak of the global financial crisis in the six months to March this year.

Interest margins are a major source of bank profits, and the margin rise helps explain why Australian banks have limited profit declines in the face of large bad debt write-offs.

Banks picked up an additional 5 basis points in the six months prior to that, bringing their current average margin to 2.27 per cent, which the Reserve Bank says is "a little above the level before the onset of the financial market turbulence in mid-2007."

Home buyers, savers relative winners

However, despite the bad press about the major banks not passing on cuts in the official interest rate to their variable home loans, people purchasing property with variable loans have been slight winners over the past six months.

The report finds that banks have reduced variable interest rates by an average 385 basis points since September 2008, while their funding costs only decreased by 330 basis points.

But those with fixed loans have not seen the benefit of historically low interest rates, meaning that the average interest rate on outstanding home loans has only fallen by 290 basis points - less than the decrease in the banks' funding costs so that, overall, the banks still come out absolute winners.

Aside from variable home loans, customers with deposits have also been relative winners because the interest rates they are receiving have not been cut by as much as the official cash rate reductions.

Average deposit rates have declined 380 basis points since September, and have been held at slightly higher levels due to a shift away from banks getting 'wholesale' funding from the world financial markets back towards competing to attract household savings.

Small business, credit cards lose

If banks are still growing their margins, but home owners and depositors are not paying for it, the obvious question is, 'who is?'

The answer contained in the RBA's report is business and those with personal loans, particularly small businesses and credit card holders.

"Variable interest rates on small business loans have fallen substantially less than housing loan rates... Overall, the weighted average cost of small business loans has fallen by 230 basis points since September 2008," the report said.

Large businesses fared much better, with rates dropping 350 basis points, which is partly to do with the ratio of fixed to variable loans in that sector, but probably also reflects the fact that small business is a particularly risky investment for banks in a recession.

Credit card holders and those with personal loans have seen the least benefit from the RBA's cuts, with rates falling a meagre 170 basis points over the last six months - less than half the official cash rate reductions.

Longer-term view

The RBA is at pains to point out in the report that bank margins have fallen substantially over the past 15 years (from well above 4 per cent, to just above 2), so that the recent rise in margins to 2.27 per cent still leaves them well below historical averages.

It also says that the past decade's phenomenon of bank interest rates closely tracking the official cash rate is highly unusual historically.

The report attributes some of the banks' ability to reduce margins to cost-cutting measures and 'economies of scale' as the major banks grew through the stable financial period of the later 1990s and early 2000s, although some of it may also be attributable to an increased reliance on bank fees to generate profit rather than interest margins.

There is also little doubt that the competitive pressure of non-bank lenders assisted in reducing margins and, therefore, that the demise of many of these lenders and increasing concentration in the banking industry may see the trend of rising bank interest margins continue well past the current economic crisis.