BANKS are making bigger profits from writing new mortgages today than at any time since 2004, putting intense pressure on lenders to cut interest rates independently of the Reserve Bank, new research suggests.

With recent earnings results showing strong profit growth from home lending, UBS analysts have predicted pressure from rivals and politicians will unleash ”out-of-cycle” mortgage rate cuts.

UBS bank analyst Jonathan Mott, the report’s author, argued that banks were generating 88 basis points of profit on a typical mortgage – equal to 88???????????????? a year for every $100 in mortgage debt.

It is the biggest margin since the UBS estimates began in 2004, and represents a rapid improvement from a year ago, when Mr Mott said the banks were probably losing money on new home loans.

But with bank share prices surging more than 15 per cent in the past three months, many in the market are wondering whether the growth is sustainable.

Mr Mott wrote that he was concerned the rally was overdone, and the market was not considering that such big profits would inevitably put greater competitive and political pressure on lenders.

”Out-of-cycle rate cuts and renewed competition are now inevitable,” the report says.

”If the global economy continues to improve, funding markets keep rallying and deposit competition continues to ease, we believe banks will come under pressure to initiate out-of-cycle rate cuts.”

Given this increase in profits, Mr Mott also said there was a real risk of political interference if the banks did not pass a fall in costs on to their customers.

Macquarie’s banking analyst, Mike Wiblin, also argued last week that profit growth caused by holding back official rate cuts was not sustainable in an election year.

The rapid turnaround in profits has come from falling wholesale funding costs and the banks’ decision to only pass on official rate cuts in part.

At the same time, however, Mr Mott’s analysis suggested banks were losing money from term deposits.

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Posted by Clancy Yeates – The Age on 26th February, 2013