Westpac boss defends holding onto rate cuts Westpac CEO Gail Kelly says conditions remain challenging for the banks, despite record profits and special dividends. Photo: Justin McManus Westpac chief executive Gail Kelly has defended her bank's recent track record of not passing on Reserve Bank interest rate cuts in full, insisting the banking sector was still doing it tough despite reporting record profits and a bumper dividend. Mrs Kelly said while wholesale funding costs - which were driven up by the credit crunch during the financial crisis - have eased, the competition in the chase for customer deposits had seen banks' overall funding costs continue to rise. "From an overall point of view, funding costs continue to go up," she said. Less than they used to before, but they haven't started to decline. Persistently high overall funding costs is the reason maintained by all the big four banks for not passing on all of the RBA's rate cuts in the recent rate cutting cycle. But Westpac is among the worst offenders, passing on just 38 of the 50 basis points in official rate cuts in October and December. It reported a modest increase of 2 basis points to its net interest margin to 2.19 per cent, and increased its cash return on equity to 16.1 per cent in the past six months. Westpac has a standard variable rate of 6.51per cent, compared to Commonwealth Bank and ANZ at 6.40 per cent, and NAB at 6.38 per cent. Mrs Kelly rejected suggestions Westpac was sacrificing the interests of its mortgage customers to subsidise its push for more retail business, including through higher term deposit rates. "We seek to balance the needs of all of our different stakeholders in the way we actually run our business," she said. You need to be a strong bank if you're going to be able to support your customers, and support the economy that you operate in. I think that we're fortunate in this economy that we do have a strong banking sector. That's the first priority. Westpac shares soared by as much as 2.6 per cent to a fresh record of $34.79 in Friday morning trade, with many investors buoyed by the 10¢ special dividend. Investors had been expecting a strong lift to Westpac's dividend in line with ANZ's bumper dividend this week, and a general shift in sentiment towards high-yielding stocks like Telstra, Woodside and the banks. But Mrs Kelly was keen to emphasise that the special dividend was not necessarily an indication of a long-term lift in its dividend payout policy. "We followed our normal pattern which is actually a 2 cent increase in our ordinary dividend which really maintains our payout ratio," Mrs Kelly said. These [the ordinary and special dividends] are not things that you add together. She said future dividend payouts would be determined by the board after evaluating the bank's capital position. And perhaps having witnessed the extraordinary social media backlash against Myer boss Bernie Brookes this week, Mrs Kelly was quick to throw her support behind the national disability insurance scheme when asked for her view. "All I'd like to say ... is that it's really good to see a programme aimed at supporting disability in the country," she said. And it's great to see it have bipartisan support. It can be a hallmark, an achievement of this parliament if they're able to do that ahead of the election. When asked about the funding of the scheme and if she had any sympathy for the way Mr Brookes was heavily criticised, particularly on Twitter and Facebook, she said: "I have no comment to make on all of that."