After the Reserve Bank of Australia (RBA) announced that they were not increasing interest rates, banks are starting to feel less optimistic about the economy.

Australia and New Zealand Banking Group (ASX: ANZ) has unveiled an essentially flat quarterly update today, following a similar update from Westpac (ASX: WBC) last week, saying net interest margins (NIMs) have dropped 8 basis points, citing that they are facing “structural headwinds that are impacting the sector”.

ANZ has made changes in Australia to improve systems and processes for simple home loans, where their application times are now in line with other major lenders. Efforts continue to improve response times for more complex home loan applications, as their home loan balance sheet grew slightly in 1Q22. Revenue was also “softer” for ANZ’s business market for the month of October on the back of trading conditions, which will hurt first-half revenue when the bank reports in May.

Changes being made by ANZ  include packages offered within its Australian Retail & Commercial business from March 2022 to provide borrowers with simpler and lower fee options. While this will benefit customers, the changes negatively impact the bank, which will shave roughly $140m from their operating income for FY22.

Despite the concern of the pandemic and dread that businesses would be hard hit by staff shortages, supply chain woes and decreased spending, the credit environment has remained mild which prompted ANZ to release $44m in provisions.

“The credit quality environment has remained benign with a total provision release of $44m during the quarter. This comprises a collective provision release of $122m and an individually assessed provision of $78m,” the Company said in its market update.

With stiff competition to keep rates lower, there is a rush to lock in fixed-rate mortgages.

Following the drop in NIMs, the difference between what the bank can borrow money and charge its customers is falling, ultimately hurting its profitability. If the RBA announces any increase in interest rates this year, it is likely to offset this issue in the long term.

If the RBA increases cash rates, investors may see a tailwind for the Big Four, who could add about $5 billion in revenue over the next three years. This would be driven by more substantial net interest margins, as the official rates increases to borrowers are not fully passed through to deposit customers.

Although the banks are facing a solid headwind now in terms of a lower return on capital, this may soon turn into a tailwind and benefit the banks in the long run.