Although the banks are also raising some term deposit rates, which will lift their funding costs over time, the small rate cut on its own is expected to benefit the big four's yearly profits by between 2 and 3 per cent. ANZ's after-tax profit would benefit by $165 million, Commonwealth Bank's by $262 million, National Australia Bank's by $226 million, and Westpac's bottom line would gain $264 million, Macquarie analyst Victor German estimated The combined benefit across the big four, which blamed the small rate cut on higher funding costs, is $917 million, according to Mr German's figures. Over the longer term, however, other forces unleashed by interest rates falling to new record lows are negative for banks, and the market's reaction to Tuesday's cut has been to sell off bank shares. Shares in each of the big four were down sharply on Wednesday afternoon, with CBA dropping 1.7 per cent, ANZ down 2 per cent, NAB losing 2.4 per cent and Westpac falling 2.3 per cent.

Investors are weighing up the benefit of the partial pass-through of the RBA's interest rate cut against the longer-term squeeze on bank's net interest margins - the difference between what they pay for funds and the cost of loans. Competition for new customers Even though Tuesday's move by banks helps preserve returns from existing loans, there is intense competition for new customers. That means new loans are being written at lower interest rates. Banks this week also raised some deposit interest rates, mainly for term deposits with a term of one-year or longer, which raises their costs. Mr German said there were other factors dragging on bank profits, but the impact of only passing on some of the RBA's cut appeared positive.

"It's difficult to see how earnings do not get an uplift on the back of what they've done." Banks have increased interest rates on longer-term deposits, but Mr German pointed out this impact would be more gradual because it only apply to new deposits, not existing deposits. He also said three- to four-month deposits tended to be the most popular with customers. "The question is to what extent you will get new customers moving their deposits from more popular short -term products to nine months plus to get the attractive rates. It's really the growth of that product that will determine what it will ultimately cost banks," Mr German said. Morgan Stanley analyst Richard Wiles said in a note that banks' net interest margins would drift lower, even with the favourable mortgage rate changes, and he thought there was "downside risk" to bank earnings from fierce competition between them to attract deposits. CLSA analyst Brian Johnson predicted banks would need to continue competing more aggressively to win deposits, in preparation for 2018 rules on how banks are funded, and this would dampen profitability.

"It feels to me as though this is net negative on their profits," Mr Johnson said. It is not the first time banks have raised some term deposits at the same time they have made unpopular mortgage decisions. Loading Several banks also raised term deposit rates in May last year, when they withheld part of the RBA's cut, but within a few months they had reversed their deposit rate decision. Banks face growing political heat over their rate decision, with Prime Minister Malcolm Turnbull on Wednesday demanding the lenders explain why borrowers will not get the RBA's 0.25 percentage point reduction.