Deposit war keeps bank margins under pressure

The Reserve Bank found competition for domestic funds had had prevented the country's banks from ratcheting up their profit margins in spite of falling wholesale costs. Margins were "fairly steady" at around 2.1%, according to the central bank's Financial Stability report.

KPMG's quarterly financial institutions performance survey recorded similar findings, noting net interest margins improved to an average 2.07% in the June quarter from the period prior.

"The cost of funds has increased faster than the associated lending income reflecting the tough competition in the market for deposits," the KPMG report said.

In the past few weeks, competition for deposits has been called "ridiculous" and a threat to sector by ANZ group chief executive Mike Smith, while Commonwealth Bank of Australia blamed it for its soft profit margin in New Zealand.